Financial Stability Report | June 2021

National Bank of Ukraine

Financial Stability Report | June 2021 1

Обкладинка



The Financial Stability Report (hereinafter the report) is a key publication of the National Bank of Ukraine. It aims to inform

about existing and potential risks that can undermine stability of Ukraine’s financial system. The report further explores the

impact of the current crisis on financial sector and mostly focuses on banking sector risks. The report also makes

recommendations to the authorities and financial institutions on measures to mitigate risks and to enhance the resilience of

the financial system to those risks.

The report is primarily aimed at financial market participants, and all those interested in financial stability issues. Publication

of the report promotes higher transparency and certainty of macroprudential policy, helps to boost public confidence in the

policy, and thus facilitates National Bank’s management of systemic risks.

The Financial Stability Committee of the NBU approved this report on 18 June 2021.



Contents

Summary 4

Financial Stress Index 6

Part 1. External Conditions and Risks 7

1.1. External Developments 7

Part 2. Domestic Conditions and Risks 10

2.1. Macroeconomic and Fiscal Risks 10

2.2. Real Estate Market and Mortgage Lending 13

2.3. Households and Related Risks 16

Part 3. Conditions and Risks in the Banking Sector 18

3.1. Financial Sector Risk Map 18

Box 1. New Methodology for Building Financial Sector Risk Map 19

3.2. Capital Adequacy Risks 20

Box 2. The Internal Capital Adequacy Assessment Process (ICAAP) 23

3.3. Retail Lending Risk 24

Box 3. Household Debt Burden Remains Acceptable 27

Box 4. New Impetus to Resolving the Issue with FX Mortgages 29

3.4. Real Sector and Corporate Loan Portfolio Quality 30

Box 5. The concentration of the banks’ corporate loan portfolio is declining 34

3.5. Banks’ Risks of Investing in Domestic Government Debt Securities 35

3.6. Profitability Risk 37

Box 6. Post-Covid “Normality” in the Global Financial Sector 40

3.7. Funding risk 41

3.8. Changes in the Regulatory Environment 43

Recommendations 45

Abbreviations and terms 48

National Bank of Ukraine Summary


Summary

The financial system remained highly profitable and resilient to the coronavirus crisis. The

financial sector has managed to pass through the crisis without incurring significant losses, as

the banks paid close attention to the quality of their portfolios before and during the crisis, and

loans to distressed borrowers were restructured in a timely manner. Banks are increasingly

using their available liquidity and capital for lending – the pace of which accelerated markedly

in 2021. The good condition of the banking sector and the economic recovery are enabling

the NBU to gradually phase out its anti-crisis measures, in particular long-term refinancing.

Moreover, sustained high profitability allows new regulatory requirements – primarily the

requirements for bank capital – to be implemented as planned.

The economic recovery continues, although not at a fast pace. The improvement in consumer

sentiment and increase in domestic demand are important economic recovery drivers.

Favorable external market conditions are supporting both GDP and the current account. The

growth in global prices, coupled with strong domestic demand, have spurred inflation. The

NBU has been responding to the increase in inflation risks since the start of 2021, twice raising

its key policy rate. However, monetary policy continues to be accommodative overall, as the

inflation risks are mainly temporary. The FX market remains balanced. Investors are regaining

their interest in the debt instruments of Ukrainian issuers. However, the access to borrowing

from global markets has narrowed due to the increase in yields on U.S. long-term securities

in Q1. This also impacted the yields on the borrowings of other countries, including Ukraine.

With global inflation risks on the rise and interest rates likely to increase, the capital markets

will remain volatile. Therefore, long pauses in cooperation with international financial

institutions pose major risks to both refinancing Ukraine’s external debts and financing the

country’s budget deficit.

The real sector also continues to recover gradually. The majority of Ukrainian companies are

coping with the coronavirus crisis without incurring large losses. Only some business

segments have faced serious difficulties. The corporate sector is resilient to the crisis, as the

service sectors that were most affected by anti-pandemic restrictions account for only a low

share of the Ukrainian economy. Corporate lending is growing noticeably: state programs are

encouraging growth in the loan portfolios of small and medium borrowers.

Retail lending is also growing, and its growth is accelerating. Unsecured consumer loans

account for the bulk of the portfolio, but some banks have been scaling up their mortgage

lending for more than a year already. The segment of unsecured loans for current needs yields

the largest profits but also carries the highest credit risks. Raising risk weights for these assets

from 100% to 150% by the end of 2021 will help banks to build up capital cushions that can

be used to absorb potential losses if credit risks are underestimated in this segment and it

becomes more vulnerable to crisis events. Mortgage lending is less profitable, but its risks are

lower. The penetration of mortgage lending to GDP is less than 1%, so the rapid growth in

mortgage lending could continue for a long time.

The impact of the coronavirus crisis on loan quality has turned out much weaker than expected

at the start of the crisis. The banks’ provisioning expenses doubled in crisis-ridden 2020, but

remained moderate and did not significantly affect the sector’s profitability. In general, the

results of an asset quality review showed that the provisions made by the banks corresponded

to the expected credit losses. High lending standards, especially for corporate segment, were

the main reason why losses from credit risk were moderate. The quality of retail loan portfolios

is also high. During the crisis, lenders became more attentive to borrowers’ ability to service

their debts, in particular through assessing their debt burden. Prudent lending standards will

contribute to the balanced growth in the loan portfolio, as well as its proper diversification.

The banks’ holdings of domestic government debt grew markedly in 2020. An increase in

investment by banks in government debt securities to finance widened budget deficits has

been observed in many countries around the world. In Ukraine, the increase was fueled by

growing yields on domestic government debt securities in late 2020, along with access to long-

term refinancing from by the NBU. However, investment in government securities did not

influence the banks’ ability and willingness to lend. The financial institutions continued to

National Bank of Ukraine Summary


increase their loan portfolios. The need for banks to finance the budget will be much lower in

2021: the deficit will narrow gradually, and other financing opportunities will become available.

Thus, the volume of domestic government debt securities in the banks’ portfolios will stop

growing, and their share in net assets may decline somewhat.

The crisis has caused major changes in the term structure of the banks’ funding: the share of

demand deposits has increased. This was driven by lower deposit interest rates and

depositors’ wish to have immediate access to their savings in the period of crisis. At the same

time, 2020 proved that even the demand deposits of households are a rather stable source of

funding. The changes in the funding structure therefore do not bear any significant liquidity

risks. The new Net Stable Funding Ratio (NSFR), which was launched as a requirement in

April 2021, will serve to minimize these risks even more.

The cost of funding has decreased for the banks. The decrease was driven by a change in

the term structure of liabilities and last year’s decline in deposit interest rates. This trend

allowed the majority of financial institutions to maintain an acceptable interest margin, despite

there being a general decline in rates. The post-crisis pickup in bank lending transactions

increased their net interest income. The potential for a decline in the cost of funds is almost

exhausted. Instead, competition on the lending market will prompt the banks to cut their loan

rates. The banks should thus adapt to operating under conditions of lower interest margins.

The banks managed to maintain high profitability, and some of the institutions paid dividends

to their owners. In addition to the increase in net interest income, high fee and commission

income also supported profitability. It proved resilient to quarantine restrictions as the financial

institutions adapted to new working conditions. Generated income comfortably covers not only

operating expenses but also provisioning, which declined markedly in 2021.

The average core capital adequacy ratio of the banks is almost twice the regulatory minimum.

The banks are taking into account future changes in capital requirements in their capital

planning. Most of the banks are effectively in complience with the future capital buffer

requirements (the capital conservation buffer and systemic importance buffer). The NBU

decided to put off the implementation of these buffers in view of the crisis that broke out in the

spring of 2020. However, the central bank will still schedule their implementation, as the sector

is highly profitable.

The NBU is continuing to harmonize bank regulations with the EU acquis. This primarily

concerns the previously announced implementation of operational risk capital requirements,

which is scheduled for 1 January 2022. Another important innovation is the start of test

calculations by the banks of internal capital under the internal capital adequacy assessment

process (ICAAP) in 2022. This should significantly improve the quality of capital management

and planning. Furthermore, the regulatory capital structure will change. After amendments to

banking legislation are approved, the NBU will receive the right to set higher bank-specific

capital requirements. The regulatory framework for nonbank financial institutions is also being

actively improved. Bills on financial services and finance companies, insurance, and credit

unions have already passed their first reading. Updating the regulatory framework will make

the financial sector much more resilient and transparent.

National Bank of Ukraine Financial Stress Index


Financial Stress Index

The Financial Stress Index (FSI) remains low. The volatility of the index over the last six months has been due to a temporary

increase in the government debt and corporate sub-indices. The latter reacted to surge in the yields on risk-free assets on the

global financial markets, and the higher threat of Russian army invading Ukraine. After the tensions on Ukraine’s borders

eased, the sub-indices returned to their previous values. The stock index of Ukrainian companies1 has reached an eight-year

high. The stress level of the banking sub-index is approaching an all-time low.

The FSI only reflects current conditions in the financial sector. It does not indicate any future risks in either the short or long

run.

Figure FSI1. Financial Stress Index

Source: NBU.

Figure FSI2. Financial Stress Index decomposition

* Correlation effect is net effect of the time-varying correlation (excluding the average correlation for the entire observation period).

Source: NBU.

1 Stock price dynamics based on Warsaw Stock Exchange index.

0.0

0.1

0.2

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0.4

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0.7

0.8

0.9

1.0

06.08 06.09 06.10 06.11 06.12 06.13 06.14 06.15 06.16 06.17 06.18 06.19 06.20 06.21

Lehman Brothers bankruptcy

IMF-sponsored anti-crisis laws

Unrests on Hrushevskogo str., Kyiv Russian aggression

in the east

Launch of talks on Ukrainian external debt reprofiling

Initial agreement on IMF terms

Insolvency of Delta bank

Russian armed agression in the Kerch Strait

Start of COVID-19 quarantine

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

06.08 06.09 06.10 06.11 06.12 06.13 06.14 06.15 06.16 06.17 06.18 06.19 06.20 06.21

Banking sub-index Household behavior sub-index Government debt sub-index

Corporate sub-index Foreign currency market sub-index Correlation effect*

National Bank of Ukraine Part 1. External Conditions and Risks


Part 1. External Conditions and Risks

1.1. External Developments

The recovery in partner countries continues thanks to, among other things, fiscal and monetary support. However, the growth

is uneven – in particular due to the varied progress of their vaccination campaigns. The coronavirus remains the main global

challenge. Capital inflows to emerging markets are uneven. At the same time, the rise of interest rates in the leading economies

creates risks for fresh borrowing. Prices for Ukrainian exports are high. Geopolitical risks are rising, and threats from Russia

are increasing.

Figure 1.1.1. Change of GDP of Ukraine’s major trading partners The economies of Ukraine’s partners are recovering,

although the recovery is uneven and is tied to their

progress in vaccination

The second and third waves of quarantine tightening have

caused uneven economic development in Ukraine’s main

trading partners. COVID-19 and its variants, and the risks of

new waves of the pandemic, will continue to threaten

economic recovery and remain factors of economic

uncertainty. The IMF has noted the direct dependence

between the pace and stability of further economic growth

and the vaccination coverage of the population. Therefore,

emerging markets (EMs) are expected to be affected more

because of the slower paces of their vaccination campaigns.

Compared to October 2020, the IMF significantly upgraded

its forecast for economic growth in the United States in 2021

(+3.3 pp), while downgrading its forecast for the euro area

(- 0.8 pp). Its forecasts for China and the European EMs were

revised slightly upward. The leading indicators of all of

Ukraine’s main trading partners are growing, although at

different paces. In many partner countries (China, United

States, the majority of Eastern Europe’s EMs, Egypt, and

Kazakhstan), real GDP will recover to pre-crisis levels as

early as 2021. At the same time, some of Ukraine’s neighbors

and many EU economies will not reach these levels this year.

The unemployment rate is also mostly higher than before the

crisis.

Global trade is actively recovering, especially in Asian

countries. Global industrial production continues to grow,

primarily thanks to the EMs.

New anti-crisis monetary measures were not needed.

Economies continue to receive fiscal support

Over the last six months, countries did not take any new

monetary and regulatory measures to fight the crisis. The

U.S. Fed signaled the winding down of its stimulus measures,

although monetary committee members expected the current

near zero rates to remain in place until 2023. The ECB has

not expanded any of its stimulus measures since the start of

2021. The Bank of Canada has become the first large central

bank to start to wind down its stimulus measures (its asset

purchase program). The central banks of many EMs are

already raising their key rates.

Large-scale fiscal support for economic recovery continues to

be provided in both advanced economies and emerging

markets. In particular, the United States in March approved

an economic stimulus program totaling USD 1.9 trillion.

Germany, the UK, Serbia, India, the Philippines, the South

* Belarus, Ukraine and Moldova.

Source: World Bank, Global Economic Prospects, June 2021.

Figure 1.1.2. Change in world trade and production, yoy, %*

* Volume of global trade; seasonally adjusted. ** Eastern Europe.

Source: Centraal Planbureau (CPB), the Netherlands.

Figure 1.1.3. Vaccinations, % of total population

* Population-weighted data for Bulgaria, Lithuania, Romania, Poland, Slovakia, Hungary, and the Czech Republic. ** Number of vaccinations per 100 residents.

Source: Our World in Data.

-9%

-6%

-3%

0%

3%

6%

9%

2019 2020 2021 2022

China Poland Russia Turkey USA Euroarea EEurope*

Forecast

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

01.06 03.08 05.10 07.12 09.14 11.16 01.19 03.21

World trade World production

Trade, EE** and CIS (r.h.s.)

0%

10%

20%

30%

40%

50%

60%

70%

12.20 01.21 02.21 03.21 04.21 05.21 06.21

West. neigbors* EU China**

Russia USA Ukraine



Figure 1.1.4. Yields on sovereign bonds of USA, EM and Ukraine African Republic, and a number of other countries also

expanded their fiscal support programs in late 2020 and early

2021. At the same time, China, the economy of which has

been growing for five consecutive quarters, moved to fiscal

consolidation.

Higher rates on risk-free assets lead to higher

borrowing costs for EMs

Interest rates on U.S. Treasury bonds, the world’s key risk-

free asset, have risen to pre-crisis levels, fueled by higher

inflation and expectations that the Fed will respond to this

trend with a rate hike. Rates stopped rising in April, but risks

of future increases remained in place. This causes higher

borrowing costs for EMs and a weaker appetite to invest in

such debt instruments. This poses a risk to Ukraine, as the

country relies heavily on foreign borrowing in order to

refinance its old liabilities and finance its budget deficit. Given

its current international credit rating and with no new tranches

from the IMF in the pipeline, further growth in yields on U.S.

dollar risk-free assets will lead to faster growth in borrowing

costs for Ukraine.

Capital inflows to EMs were uneven

The Institute of International Finance (IIF) expects that

portfolio investment inflows to EMs in 2021 will exceed the

pre-crisis level of 2019. China will be the main recipient of

international capital (accounting for almost 40%). The EM

governments’ needs to finance their budgets for 2021 will

decrease compared to 2020, but will remain higher than

before the pandemic.

Prices for EM assets grew more slowly than those for assets

of advanced markets. Equity prices in Europe’s frontier

markets and the CIS countries remained almost unchanged.

The exchange rate volatility of EM currencies was relatively

low.

In the World Bank’s estimates, global remittances from labor

migrants in 2020 declined less than expected at the start of

the crisis. Last year, remittances sent to low- and middle-

income countries exceeded the amount of foreign direct

investment and official assistance provided to these

countries. Remittances to Ukraine rebounded after declining

in the spring of 2020 and in early 2021. As these remittances

come from developed countries, stable volumes can be

expected.

Commodity prices soared

The recovery in the global economy and international trade,

along with sectoral factors, caused a sharp rise in global

commodity prices. This is favorable for Ukrainian exports.

Higher demand and situational supply problems (particularly

from Brazil) supported high steel prices. Ore prices are at a

record high. Prices for Ukrainian food exports are on the rise,

driven by bad weather (wheat), high demand from animal

farming and bioethanol production (corn), and weaker

harvests and decreased inventories (sunflower oil).

Crude oil prices will remain close to current levels. On the one

hand, oil prices are supported by improved economic

* Above the yields on 10-year U.S. Treasury bonds. **Based on Ukrainian long-term USD-nominated government Eurobonds.

Source: СBonds, Bloomberg.

Figure 1.1.5. Changes in U.S. and EM stock market indices and U.S. dollar index, 1 January 2021 = 100%

* Weighted by trade in goods and services, Fed. ** Index of frontier economies of Europe and CIS excluding Russia (includes Estonia, Kazakhstan, Lithuania, Romania, Serbia, Slovenia, and Croatia).

Source: Federal Bank of St Louis, Morgan Stanley, US Federal Reserve System.

Figure 1.1.6. EM government debt and financing needs, % of GDP

Source: NBU, IMF, Global Financial Stability Report, April 2021.

0%

2%

4%

6%

8%

10%

12%

14%

01.18 05.18 09.18 01.19 05.19 09.19 01.20 05.20 09.20 01.21 06.21US 10-year Treasuries yield

EMBI+ Sovereign Spread*

Indicative yield on Ukrainian sovereign debt**

90%

95%

100%

105%

110%

115%

60%

80%

100%

120%

140%

160%

01.18 06.18 11.18 04.19 09.19 02.20 07.20 12.20 06.21

S&P500 MSCI EM

MSCI EFM+CIS (ex-Ru)** US dollar index* (r.h.s.)

0%

2%

4%

6%

8%

10%

12%

14%

16%

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10%

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80%

2009 2011 2013 2015 2017 2019 2021

Gross financing needs (r.h.s.) Government debt



Figure 1.1.7. Private remittances to Ukraine, USD billions* expectations and OPEC production cuts. On the other, they

are restrained by a larger supply of oil from the United States

and Russia, and by limited demand from India due to the

coronavirus crisis. If an agreement with Iran regarding its

nuclear program is reached, this may lead to an increase in

supply and a decrease in oil prices. In the meantime, natural

gas prices are rising, in particular due to tighter environmental

requirements in the EU. This may pose a risk to the financial

and economic stability of Ukraine.

Geopolitical risks rise again

Having declined in Q1, geopolitical risks have started to rise

again. This has been caused by increased tensions between

Russia and the West, Russian troops massing on Ukraine’s

borders, and the escalation of the Israeli–Palestinian conflict

this spring. Relations between the Belarusian authorities and

the rest of the world have become more difficult, especially

after the forced landing of a plane belonging to Irish Ryanair

airline in Minsk. Russia’s influence on Belarus is becoming

stronger. This may lead to reciprocal trade restrictions by

Ukraine and Belarus, which accounted for almost 3% of

Ukraine’s exports. Trade policy uncertainty decreased across

the globe, although the factor of a conflict in economic

interests between the United States and China persists.

Russia escalates the situation on Ukraine’s borders

In April, Moscow massed troops on Ukraine’s borders.

Further escalation was avoided thanks to the support shown

by Ukraine’s international partners. However, the troops were

withdrawn only partially, new military units are being formed

on Russia’s western border, and the threat of new escalations

persists. According to Russia, it handed out around 530,000

of its passports over two years to people in the non-

government controlled areas of Donetsk and Luhansk

oblasts. This complicates the conflict settlement.

As a Paris court of appeal has overturned a ruling by the

International Tribunal on the case of Oschadbank versus the

Russian Federation regarding compensation for losses

incurred in occupied Crimea, the state-owned bank faced

risks. Oschadbank appealed against this decision. At the

same time, progress is being made in lawsuits against Russia

in the European Court of Human Rights and the International

Court of Justice in the Hague. Ukrainian companies that

incurred losses because of Russian aggression in the east of

Ukraine and the occupation of Crimea have filed a total of

over USD 4.5 billion worth lawsuits for commercial arbitration.

Construction of Nord Stream 2 resumed

Russian vessels continued to lay the Nord Stream 2 gas

pipeline in early 2021. In May, the U.S. president lifted

sanctions against the pipeline’s owner company in the hope

of improving U.S. relations with the EU. In June, it was

reported that the first string of the pipeline had been

completed. This Russian project carries both economic and

security threats for Ukraine. The U.S. Congress is

considering re-imposing sanctions.

* From official and unofficial sources.

Source: NBU.

Figure 1.1.8. Global commodity prices*, Q1 2021 = 100%

* Oil – Brent; iron ore – China, iron ore fines 62%; steel – steel billet; wheat, corn – quarterly averages.

Source: NBU, Inflation Report, April 2021.

Figure 1.1.9. Geopolitical Risk (GPR)* Index and Trade Policy Uncertainty (TPU)** Index

* https://www.matteoiacoviello.com/gpr.htm. ** https://www.matteoiacoviello.com/tpu.htm. Source: Dario Caldara and Matteo Iacoviello.

0.0

0.5

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Q1.15 Q4.15 Q3.16 Q2.17 Q1.18 Q4.18 Q3.19 Q2.20

Poland Other EU states USA Russia Other countries

Q4.20

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140%

Q1.16 Q4.16 Q3.17 Q2.18 Q1.19 Q4.19 Q3.20 Q2.21 Q1.22 Q4.22

Oil Nat. gas Steel

Iron ore Corn Wheat

Forecast

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05.14 05.15 05.16 05.17 05.18 05.19 05.20 05.21

GPR World GPR Ukraine TPU

https://www.matteoiacoviello.com/gpr.htm

National Bank of Ukraine Part 2. Domestic Conditions and Risks


Part 2. Domestic Conditions and Risks

2.1. Macroeconomic and Fiscal Risks

High global prices and domestic demand are helping Ukraine’s economy recover. However, the recovery is slower than

expected. Monetary policy remains accommodative. At the same time, the NBU is starting to gradually phase out its anti-crisis

monetary instruments. The main short-term risks include foreign-currency external debt repayments, which will peak in

September. Cooperation with the IMF guarantees lower threats to financial stability, and must be continued. With the current

credit ratings of Ukraine, the absence of continuous cooperation with international financial institutions would make the country

very vulnerable to global economic shocks.

Figure 2.1.1. Contributions of final use categories in annual change of real GDP, pp The economic recovery is slower than expected

According to current estimates, GDP declined by 2% yoy in

Q1 2021. This result contrasts with the fast-paced recovery

in consumer demand and the favorable situation in the

majority of key economic sectors. GDP was negatively

affected by lower volumes of goods exports, a rapid recovery

in imports, and sluggish investment. Quarantine restrictions

were an additional factor behind the decline.

As in other countries, GDP growth yoy will be significant in

Q2 thanks to the effect of the last year’s low comparison

base. All the same, the overall situation is improving: private

consumption is surging, and trade conditions are very

favorable for the main exporting industries. The risk persists

that a new lockdown will be introduced if the number of

COVID-19 cases starts to rise again. The vaccination

campaign is still slow: only 4% of Ukraine’s population had

received at least one dose of the vaccine by mid-June.

However, the economy has mostly adapted to working under

the quarantine, while new restrictions are becoming more

flexible for businesses. As of the end of the year, GDP should

increase by 3.8%, and will be slightly less than in 2019.

Investment activity is insufficient to boost growth rates.

Global prices contribute to the stability of the current

account

A significant improvement in external economic conditions is

supporting the growth in exports and thus also bolstering the

economic recovery. In addition, high global prices have

improved businesses’ financial performance. In particular, the

amount of profits reinvested by companies with foreign direct

investment (FDI) was the highest since 2015. This

component, which is reflected as payouts in the current

account, caused a current account deficit in Q1 2021. At the

same time, the growth in import volumes has been

accelerating since the start of the year due to a recovery in

consumer and investment demand and larger energy

supplies. In such a way, the deficit in the trade in goods will

widen by the end of the year, and the current account balance

will remain negative.

The financial account recorded a small capital inflow in Q1.

The inflow came from high reinvested earnings, which offset

capital outflows from the private sector under other items. In

turn, capital inflows continued to the government sector,

although they were smaller than at the end of 2020. Their

further dynamics will mostly depend on cooperation with the

IMF, the situation on the international capital markets, and the

* Together with noncommercial organizations that serve households. Change over Q1 2021 is based on the SSSU estimate in May; estimates of contributions are provided by the NBU. The forecast for Q2–Q4 is based on the NBU’s estimates, April 2021.

Source: SSSU, NBU estimates.

Figure 2.1.2. Capital investment by asset type in 2010–2020, % of GDP

Source: SSSU.

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-15

-10

-5

0

5

10

15

20

Q2.19 Q4.19 Q2.20 Q4.20 Q2.21 Q4.21

Net exports Change in inventories

Gross fixed capital form. Government consumption

Private consumption* GDP, % yoy

Forecast

0%

4%

8%

12%

16%

20%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Investments in intangible assets Other tangible assets

Vehicles Machinery, equipm. and invent.

Engineering structures Non-residential buildings

Residential buildings



Figure 2.1.3. Balance of payments in 2016–2021, trailing twelve months, USD billions continuation of reforms. The baseline forecast envisages net

capital inflows to Ukraine as of the end of the year – as a

result of further growth in FDI, and an increase in borrowing

by the government and private sectors.

Since the start of the year, the interbank foreign exchange

market has been operating effectively almost without the

participation of the NBU. Volumes of foreign currency

purchased and sold by the NBU decreased several fold year-

on-year. International reserves are at a relatively comfortable

level. Their volume exceeds four months of future imports

(while three months are considered sufficient), and is close to

the minimum adequate level according to the IMF composite

criterion.

Monetary policy remains accommodative

The rise in global prices – in particular, prices for food and

energy – is one of the factors behind the higher inflation seen

in Ukraine. Inflation deviated from the 5% ± 1 pp target range

at the start of the year and continued to accelerate. The NBU

forecasts inflation will return to its target range in 2022. Along

with global prices, inflation is influenced by domestic

consumer demand, which is actively recovering from last

year's crisis, and rising administered prices. At the same time,

prices for some raw foods started to decline in May, which will

somewhat restrain inflation. Inflation is accelerating in most

countries, including in the advanced economies. The

acceleration is largely due to temporary factors and will be

further constrained by increasing supply.

The NBU raised the key policy rate twice in H1, overall from

6% to 7.5%. However, monetary policy remains

accommodative, with the real key policy rate being lower than

its estimated neutral level. In June, the NBU kept the key

policy rate unchanged. At the same time, the regulator

decided to start unwinding anti-crisis monetary instruments

such as long-term refinancing and interest rate swaps with

the NBU, and stop providing them altogether on 1 October

2021 if there are no further significant shocks to the financial

markets. The hikes of the key policy rate in March and April

paused the cycle of reducing bank deposit rates. The impact

of this spring’s increases in the key policy rate on yields on

newly placed domestic government debt securities was the

most pronounced for short-term paper (three to six months).

Concurrently, bonds with maturities of one year and more

continue to be the most in demand. As the government has

significant needs for financial resources, a decline in yields is

unlikely in the near future.

The pause in cooperation with the IMF is a risk to

macroeconomic stability

As yields on long-term securities in the United States

increased at the beginning of the year, borrowing became

more expensive for all issuers, including the Ukrainian

government. High inflation in the United States may cause a

new rise in long-term rates. This, in turn, may complicate

Ukraine’s access to borrowing from external markets. In the

period when the effects of the crisis caused by the COVID-19

pandemic are still uncertain for financial markets, it is

essential for Ukraine to have uninterrupted access to

international official financing. The IMF program is a kind of

* Current account and capital account.

Source: NBU.

Figure 2.1.4. Gross and net international reserves, USD billions

* The minimum level of reserve adequacy ARA (Assessing Reserve Adequacy) is calculated by the IMF for countries with a floating exchange rate using the following formula: 5% × export volumes of goods and services + 5% × broad money + 30% × short-term external debt + 15% × other external liabilities.

Source: NBU.

Figure 2.1.5. Volumes of transactions to sell noncash foreign currency on the interbank market (USD billion, equiv.)*

* According to statistical reporting data provided by banks. Bank transactions on the terms of TOD, TOM, and SPOT; customer transactions on the terms of TOD, TOM, SPOT, and FORWARD; NBU operations – purchase and sale of currency; volumes of purchases/sales on the interbank FX market of Ukraine do not include internal transactions of banks with customers.

Source: NBU.

-25

-20

-15

-10

-5

0

5

10

Q1.16 Q1.17 Q1.18 Q1.19 Q1.20 Q1.21

Financial account balance Current account balance*

Total balance

0

2

4

6

8

0

10

20

30

40

01.14 11.15 09.17 07.19 05.21

Minimum level of reserves adequacy ARA*

Gross reserves

Net reserves

Months of future imports (r.h.s.)

0%

5%

10%

15%

20%

25%

0

3

6

9

12

15

01.20 03.20 05.20 07.20 09.20 11.20 01.21 03.21 05.21

NBU’s operations Sale by banks

Sale by clients NBU’s share (r.h.s.)



Figure 2.1.6. FX payments of the government and the NBU, USD billions equiv.* insurance policy for countries with low ratings, providing a

guarantee that periods of repayments will be traversed

orderly and with minimum risks to macroeconomic and

financial stability. Under current conditions, Ukraine can raise

funds from international capital markets even without the IMF

program, although at a higher cost. However, the medium-

and long-term planning of government finances should not be

based on the assumption that markets will always remain

favorable for non-investment-grade countries.

Debt refinancing and covering the budget deficit are the

key fiscal risks

The schedule of debt repayments will remain tight for Ukraine

in the coming years. In the next twelve months, FX

repayments by the government and the NBU on public and

publicly guaranteed debt will exceed USD 10 billion. In the

hryvnia segment of the market, repayments of principal and

interest in H2 will exceed UAH 130 billion. The repayments

are distributed relatively evenly, which should not cause

significant problems for the Ministry of Finance. However,

average auction volumes should rise.

Financing needs could be moderated by the additional issue

of Special Drawing Rights (SDRs) that is being considered by

the IMF. The SDR issue would amount to USD 650 billion,

and would be aimed at helping the global economy recover

from the coronavirus crisis. If the IMF Board of Governors

approves the issue, Ukraine will increase its international

reserves by around USD 2.7 billion. Nevertheless, it is highly

probable that the funds will be received after the period of

peak repayments in September. It is also not clear if the funds

could be used to finance the budget deficit.

An increase in liquidity buffers is a necessary element

of risk control

The government’s liquidity improved slightly in the first five

months of 2021. The average daily balances on the

Treasury’s hryvnia and foreign currency accounts were

higher than or comparable with the balances of the previous

three years. That said, the hryvnia balances were evidently

more stable, which may indicate a certain improvement in

budget governance. However, the liquidity buffer sometimes

fell sharply below the minimum acceptable level. This points

to the need for better forecasting of cash flows and an

increase in the forecast horizon of the Single Treasury

Account to 3–6 months. In particular, the forecast of annual

transfers of the NBU’s profit to the budget will be more

accurate if it corresponds to the NBU’s calculations. This will

help avoid a recurrence of this year’s situation, when the

actual transfer turned out to be UAH 8.6 billion smaller than

the amount approved by parliament.

* Including interests, ** including US-guaranteed Eurobonds worth USD 1 billion – to be repaid in September 2021.

Source: MFU.

Figure 2.1.7. Dynamics of Ukraine’s credit ratings*

* Ratings of long-term debt obligations in foreign currency in 2004–2021.

Source: NBU estimates.

Figure 2.1.8. Daily balances of Treasury’s accounts in hryvnia and foreign currencies (USD equiv.) in 2017–2021, billion units*

* Faces of the rectangle show the first and third quartiles of the distribution. The line inside the rectangle is the median. The lines above and below the rectangle indicate the maximum and the minimum.

Source: STSU, MFU, NBU.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

07.21 09.21 11.21 01.22 03.22 05.22

NBU’s payments to IMF Eurobonds**

Govern. payments to IMF Other payments

Domestic FX bonds

91011121314151617181920212223

07.04 12.06 05.09 10.11 03.14 08.16 01.19 06.21

Standard & Poor’s Moody’s

Fitch Investment rating

S&P/Fitch/Moody’sBBB-/BBB-/Baa3BB+/BB+/Ba1BB/BB/Ba2BB-/BB-/Ba3B+/B+/B1B/B/B2B-/B-/B3CCC+/CCC+/Caa1CCC/CСC/Caa2CCC-/CСС-/Caa3CC/CC/CaC/C/CaRD/RD/CSD/D/

0

10

20

30

40

50

60

70

80

2017 5M20212019

UAH

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2017 5M20212019

FX

0



2.2. Real Estate Market and Mortgage Lending

Demand for housing is gradually rising, fueled by the rebound in mortgage lending. Although prices are actively increasing,

housing remains reasonably affordable by historical standards because house prices and household income are growing at

comparable rates. In early 2021, new housing was commissioned at a fast pace, but the ongoing reform of the construction

control system may slow the supply of new housing in the future. Mortgage lending is rallying rapidly, propped up mainly by

lending for secondary market housing purchases. The primary housing market remains unregulated, which makes it less

attractive to banks. Demand for commercial real estate remains sluggish, as the adverse impact of the pandemic continues.

Figure 2.2.1. Housing market activity Demand for housing is rising

With the exception of 2020, which was an outlier, demand for

housing in Ukraine has been rising slowly from year to year.

Last year, this trend was interrupted by the weak Q2, the

quarter in which the pandemic was spreading. Overall, the

number of agreements concluded for the purchase/sale of

residential property dropped by 7.8% in 2020 compared to

2019. In Q1 2021, purchasing activity on the housing market

was almost one tenth higher than the first-quarter average for

five years. Moderate growth in housing demand will persist in

the years to come. This growth is being propelled by the

gradual revival in mortgage lending and the rapid growth in

household income. Housing demand is also being whipped

up by lower deposit rates, which are encouraging some of

those who have significant savings to look for alternative

ways to invest.

Housing prices are on the rise: in April, price growth on both

the primary and secondary markets in Kyiv exceeded 10%

yoy. The growth resulted from several factors. First,

construction costs are increasing: in April, the housing price

index was 108.9 yoy. Second, the protracted reform of the

construction control system may reduce the supply of new

housing in the future, while the existing housing stock is

relatively limited. Also, demand for housing is rising, partly

due to the rebound in mortgage lending.

Although house prices are rising, housing remains affordable

in relative terms. Prices and household income are growing

at comparable rates. For over a year, the price-to-annual

income ratio in Kyiv has been at its lowest in over a decade.

Meanwhile, the price-to-annual rent ratio has increased by

almost one point over the year, as rent prices have remained

practically unchanged. As a result, housing has become

slightly less attractive to buy-to-let investors. That said, the

price-to-annual rent ratio in Ukraine is still rather low by

international historical standards2.

Housing construction has slowed in nominal terms

Last year the amount of commissioned housing decreased by

one half on 2019. However, these data are not very

informative. First, the long-lasting reform of the State

Architecture and Construction Inspection of Ukraine (SACIU)

limits growth in the supply of new housing. Second, last year

the SSSU provided preliminary and incomplete data about

new housing due to the transfer to the Single State Electronic

Construction System. The new housing supply in Ukraine in

Q1 2021 exceeded the first-quarter average over ten years

by 1.5 times. It is likely that these data comprise some

Source: Ministry of Justice of Ukraine, real estate agencies, NBU estimates.

Figure 2.2.2. Price-to-income and price-to-rent ratios of the primary real estate market of Kyiv

Source: SSSU, real estate agencies, NBU estimates.

Figure 2.2.3. Housing prices and construction costs, UAH thousands/sq. m

Source: Ministry for Communities and Territories Development of Ukraine, LUN website.

2 According to international statistics, values below 15 indicate that it is more profitable to buy than rent housing. This means that house prices are relatively low.

0%

25%

50%

75%

100%

125%

150%

0

20

40

60

80

100

120

Q1.17 Q3.17 Q1.18 Q3.18 Q1.19 Q3.19 Q1.20 Q3.20 Q1.21

Number of sale agreements of housing, thousands units

Housing price index on the Kyiv PM, Q1 2017 = 100% (r.h.s.)

9.3

5.1

0

2

4

6

8

10

12

14

16

18

12.09 03.11 06.12 09.13 12.14 03.16 06.17 09.18 12.19 03.21

Price-to-rent Price-to-income (for households)

6

10

14

18

22

26

30

06.17 03.18 12.18 09.19 06.20 03.21

Construction cost in Ukraine

Construction cost in Kyiv

Minimum price of housing on Kyiv PM

Average price of housing on Kyiv PM



Figure 2.2.4. Commissioned residential property in apartment blocks, millions sq. m completed facilities that were not included in the 2020 data.

Housing commissioned in Kyiv in Q1 was still one fifth short

of the ten-year average.

As of the end of May 2021, since the start of the year, Ukraine

has issued 213 construction permits and 253 certificates

commissioning new residential buildings. The average

annual ratio of permits and certificates is about 3 to 4, which

is rather low according to international standards3, and could

indicate a slower pace of commissioning of new housing in

the future. An analysis of applications submitted over the last

12 months to obtain permits shows that only half of these

documents are approved. The protracted reform of the

control system of architecture and construction, which has

been going on for over a year, prevents the real estate market

from functioning properly. Any further delays in regulating the

market will slow the creation of new housing supply in the

future.

The current problems with the permit-issuing system are

aggravating the underlying problem of the under-regulation of

the primary real estate market. This results in tens of

thousands of investors being defrauded and hundreds of

construction projects being unfinished. In early 2021,

parliament registered a draft law that strengthens the

protection of investors’ rights. If the law is adopted, Ukraine

will have more reliable mechanisms for financing

construction. Among other things, the law will introduce a

guaranteed construction share, i.e. an area of housing that

can only be sold after the construction is completed, and the

procedure of registering ownership rights to uncompleted

constructions. The next important step should be to make the

market more transparent by requiring developers to disclose

complete information, mainly on the number of their

construction projects, their area, sources of financing, and the

pace at which they are sold. Data on the state of the market

should be up-to-date, exhaustive and publicly available.

Mortgage lending is rallying at a fast pace

Mortgage lending in Ukraine has been reviving actively since

mid-2020. The revival was mainly driven by lower rates: the

weighted average effective rate on mortgagees dropped by

about 7 pp compared to the start of the previous year, and

totaled 14.1% in April. In the first four months of the year, the

number of new mortgages almost doubled, with the amount

of mortgages nearly tripling yoy. Active mortgage lending in

March and April is partly driven by the governmental support

program. The growth in mortgage amounts was mainly fueled

by loans for the purchase of secondary market housing. Over

the last 12 months, only about 15% of new mortgages have

been issued to purchase newly built property. In order to

launch large-scale mortgage lending, it is crucial to ensure

that the primary housing market is properly regulated and that

the rights of creditors are better protected. The legal

framework should guarantee a level playing field for both

borrowers and creditors.

Source: SSSU.

Figure 2.2.5. Issued certificates of commissioning and permits to construct apartment blocks in Ukraine, units

Source: Single State Electronic Construction System.

Figure 2.2.6. Distribution of permissive documentation, submitted since May 2020* by status

* Data for May and June 2020 is incomplete.

Source: Single State Electronic Construction System.

3 Battistini, Niccolò, Le Roux, Julien, Roma, Moreno and Vourdas, John, (2018), The state of the housing market in the euro area, Economic Bulletin Articles, 7, issue , number 2, https://EconPapers.repec.org/RePEc:ecb:ecbart:2018:0007:2.

0%

15%

30%

45%

60%

0

2

4

6

8

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

In Kyiv during Q1 of reporting year

In Ukraine (except Kyiv) during Q1 of reporting year

In Kyiv during Q2–Q4 of reporting year

In Ukraine (except Kyiv) during Q2–Q4 of reporting yearPercentage of Kyiv and Kyiv Oblast, pp (r.h.s.)

0

10

20

30

40

50

60

70

07.20 09.20 11.20 01.21 03.21 05.21

Certificates of comissioning received Building permits received

0

200

400

600

800

1000

Certificates of commissioning Building permits

Approved Denied

Returned without processing Returned for refinement

Other reasons

https://econpapers.repec.org/RePEc:ecb:ecbart:2018:0007:2



Figure 2.2.7. New mortgage disbursements and interest rates In early 2021, the government launched the 7% affordable

mortgage lending program, which offers reduced mortgage

rates for borrowers. This program could boost demand for

mortgages significantly. Since the banks alone bear credit

risks under the program, they continue to apply their current

approaches to assessing the creditworthiness of borrowers.

The NBU assesses these approaches as being mostly

conservative. One should bear in mind that a large increase

in mortgages pushes house prices up. This is especially

relevant in view of the problems with the primary housing

market, which could speed this process up. Ensuring that a

rebound in mortgage lending has only a moderate impact on

house prices requires removing, in due time, barriers to the

proper functioning of the market.

The commercial real estate market transformed during

the quarantine

Only in May-June 2021 did the first signs of recovery on office

premises market began to show. However, the market

remains weak, as companies are returning to the office work

format only gradually. Moreover, the supply of new premises

has increased by 7% over the last year. Thus, the vacancy

rate remains high, and tenants will therefore dominate the

office market for a long time to come. Rent rates are below

the levels seen before the crisis, but lessors are making

increasingly fewer concessions to attract new tenants.

Full lockdown restrictions that were imposed on the sector of

retail property on several occasions caused significant

volatility in mall owners' incomes over the last 15 months.

During the strict quarantine restrictions, lessors often had to

set rent rates at their operating expenses level. That said, the

market remains fundamentally sustainable, is recovering

quickly and is expected to grow further. The key factor is high

growth rate in retail turnover. New premises were brought to

the market, albeit at a slower pace than previously expected.

Vacancy rates on the market have not yet recovered to pre-

crisis levels.

Commercial real estate market probably depends the most

on further pandemic developments, which are still uncertain.

Yet the impact of malls and business centers operations on

the banking sector is limited. Total loans to the segment

account for less than 2% of performing corporate loan

portfolio.

Source: banks’ data, NBU estimates.

Figure 2.2.8. Performance indicators of office property market in Kyiv

* USD equivalent.

Source: consulting companies, NBU estimates.

Figure 2.2.9. Performance indicators of retail property market in Kyiv

* USD equivalent.

Source: consulting companies, NBU estimates.

0%

10%

20%

30%

40%

0

200

400

600

800

12.18 07.19 02.20 09.20 04.21

New mortgage loans issued within a period, UAH millions

Weighted average mortgage effective interest rate, % (r.h.s.)

0%

6%

12%

18%

24%

30%

36%

0%

25%

50%

75%

100%

125%

150%

Q4.09 Q4.12 Q4.15 Q4.18

Vacancy of prime property, % (r.h.s.)

Change of the highest rent rate*, 12.2009 = 100%

Q4.20

0%

2%

4%

6%

8%

10%

12%

0%

25%

50%

75%

100%

125%

150%

Q4.10 Q2.13 Q4.15 Q2.18 Q4.20

Vacancy of prime property, % (r.h.s.)

Change of the highest rent rate*, 12.2009 = 100%



2.3. Households and Related Risks

Household income is growing rapidly, as are wages, its main component. The rise is being driven by the post-crisis economic

recovery. While households’ perceptions of their well-being are still below pre-pandemic levels, consumer sentiment has

already improved to pre-crisis levels. Consumer spending and loans are rising together with incomes and sentiment. However,

the debt burden on households is still low. The propensity to save is high: deposits are growing, although a significant portion

of savings are being held in current accounts.

Figure 2.3.1. Change in real disposable income, consumer spending, and the unemployment rate Disposable income continues to grow

The major components of real disposable income have been

growing since mid-2020. Specifically, its main component –

wage – has increased. Nominal wages are rising at the same

rate as was usual for this time of year before the pandemic.

Real wage growth has been markedly slowed by inflation,

which has accelerated in recent months. In the first four

months of 2021, the average real wage increased by 11.3%

yoy. Wages are being positively affected by the recovery of

business activity amid the easing of quarantine. Remittances

from migrant workers have been declining since 2020.

However, this phenomenon is likely temporary: the recovery

in the host economies, coupled with the simplification of

border crossings as quarantine restrictions ease, will help

revive migrant worker remittances.

Having fallen during the crisis, the current household

standing index is recovering slowly, according to an Info

Sapiens survey. Only in April did it approach its pre-pandemic

levels. Despite the growth in incomes, more than half of

Ukrainian households consider their income insufficient to

live on. This is evident from the results of the June express

survey of the European Business Association (EBA).

Respondents said that their income was enough for basic

expenses, but not sufficient for vacations, luxury items, cars,

or real estate. They said that they either would have to save

over a long period of time to buy those things, or would never

be able to afford them at all. This share increased by 10 pp

for the year.

Real disposable income will continue to grow due to the

economic recovery. According to NBU forecasts, real wages

will grow by 8.6% yoy for the year, which will increase the

income of employees, a key category of bank depositors and

borrowers. However, slow vaccination and the instability of

the epidemiological situation threaten to result in another

tightening of quarantine measures. They, in turn, create

difficulties for businesses, posing the risk of a slower rise in

incomes.

Business sentiment deteriorated significantly

The fallout from the pandemic significantly affected the

income of entrepreneurs, who account for a quarter of the

households’ disposable income. An EBA survey held in

February 2021 showed a significant worsening of

entrepreneurial sentiment due to weaker demand. During the

year, the number of sole proprietors satisfied with the current

standing of their business almost halved, to 24%. To support

sole proprietors during the pandemic, the government

introduced a number of tax breaks: some entrepreneurs were

exempted from paying the single social contribution, they

* Percentage of the economically active working age population.


Figure 2.3.2. Change in real wage and pensions, yoy


Figure 2.3.3. Wage dynamics, January = 100%


6%

7%

8%

9%

10%

11%

-10%

-5%

0%

5%

10%

15%

Q2.18 Q4.18 Q2.19 Q4.19 Q2.20 Q4.20Household real disposable income, yoyHousehold real final consumption expenditure, yoyUnemployment rate* (ILO), % (r.h.s.)

-15%

-10%

-5%

0%

5%

10%

15%

20%

Q1.19 Q2.19 Q3.19 Q4.19 Q1.20 Q2.20 Q3.20 Q4.20 Q1.21

Real wages received in Ukraine

Real wages received from abroad

Real pensions

90%

95%

100%

105%

110%

115%

120%

Jan. Feb. Mar. Apr. May June Jan. Feb. Mar. Apr. May June

Nominal wage Real wage

2018 2019 2020 2021



Figure 2.3.4. Movements in the consumer confidence and well-being index in Ukraine were allowed not to pay fines or penalties, and their debts

were partially written off. In addition, the preferential lending

program “5–7–9” has been operating for about a year now.

Moreover, about 340,000 sole proprietors and employees

received one-off COVID-19 relief payments to reimburse

them for the tightening of the quarantine in 2020.

Consumer sentiment fuels lending

According to Info Sapiens, consumer sentiment improved to

its pre-quarantine level. It supports consumption and drives

consumer lending. In annual terms, new hryvnia consumer

loans from the banks grew faster than consumer spending.

As a result, the ratio of new consumer loans from the banks

to consumer spending reached an all-time high of 14%. For

nonbank financial institutions (NBFIs), this figure is only 1%.

Though still quite moderate, the impact of consumer credit on

consumption is rising.

At the same time, the overall debt burden on households has

continued to gradually shrink as the growth in nominal

incomes has outpaced lending. The ratio of retail loans to

GDP now approaches 5%. The loans-to-deposits ratio has

fallen to a historic low. Such low rates indicate significant

lending potential. The banks, for their part, perceive

households’ demand for loans, especially mortgages, as

high. They attribute the shift in demand to lower interest rates.

Broken down by borrower group, the debt burden also

remains acceptable, despite the crisis. (see Box 3. The debt

burden on households remains acceptable).

Households still have high propensity to save

Despite the recovery in consumer sentiment and costs, the

supply of a number of goods and services remains limited.

This is due to the periods of strict quarantine, as well as the

slow recovery in services, especially tourism. Therefore, the

unused portion of income generates savings. At the same

time, instability in the labor market encourages low-income

individuals to spend more cautiously. Driven by these factors,

savings continue to grow.

A value of the index of 100 indicates neutral sentiments: equal shares of positive and negative assessments.

Source: Info Sapiens, monthly surveys of households (age 16+).

Figure 2.3.5. Impact of consumer lending on consumer spending


Figure 2.3.6. Household debt burden


30

40

50

60

70

80

90

100

110

01.19 04.19 07.19 10.19 01.20 04.20 07.20 10.20 01.21 04.21Consumer sentiment index

Current standing index

Economic expectations index

-3%

0%

3%

6%

9%

12%

15%

-200

0

200

400

600

800

1000

Q2.19 Q3.19 Q4.19 Q1.20 Q2.20 Q3.20 Q4.20 Q1.21

Consumer expenditure, UAH billions

New bank loans for current needs to consumer expenditure ratio (r.h.s.)

New NBFI loans for current needs to consumer expenditure ratio (r.h.s.)

Change in bank consumer loans to consumer expenditure ratio (r.h.s.)

0%

10%

20%

30%

40%

50%

0%

5%

10%

15%

20%

25%

2015 2016 2017 2018 2019 2020Household debt to GDP

Household debt to disposable income

Loans-to-Deposits (r.h.s.)

National Bank of Ukraine Part 3. Banking Sector Conditions and Risks


Part 3. Conditions and Risks in the Banking Sector

3.1. Financial Sector Risk Map4

Figure 3.1.1. Financial Sector Risk Map* Macroeconomic risk decreased

In Q1 2021, the macroeconomic risk returned to its pre-crisis

level. This was facilitated by a favorable forecast for further

GDP growth, the lower cost of five-year credit default swaps

(CDS), and a sustained large surplus of the current account

of the balance of payments.

Retail credit risk: unchanged

This risk has been moderate since H2 2020. Banks improved

their expectations for the quality of their retail loan portfolios.

The index of households’ economic expectations also

improved.

Corporate credit risk declined

The credit risk of corporate borrowers is moderate. Two

opposing factors are influencing this indicator. On the one

hand, the business outlook index and expectations for bank

loan portfolio quality are improving. On the other hand, last

year’s crisis has weakened companies’ financial

performance.

Capital adequacy risk: unchanged

The capital adequacy risk is moderate, as evident from strong

capital adequacy ratios. The decline in the ratio of common

equity and assets of banks – the leverage ratio – has been

the main drag on capital development recently.

Profitability risk: unchanged

The majority of profitability ratios, namely the rate of return

and net interest margin, indicate that this risk is low. An

increase in the ratio of operating expenses to income of

banks in late 2020 had the most negative impact on the

assessment of this risk.

Liquidity risk: unchanged

The liquidity risk remains at an all-time low. This is driven in

particular by the rapid growth in retail deposits.

FX risk: unchanged

The FX risk remains moderate thanks to low exchange rate

volatility, sufficient international reserves, and upbeat market

expectations.

* The NBU assesses risks on a scale from 1 to 10, with 1 being the lowest level of risk, and 10 the highest. The assessment reflects the outlook for the next 12 months.


Figure 3.1.2. Financial sector risk heat map

Risks 2015

2017

2019 03.21

Macroeconomic risk

Retail credit risk Corporate credit risk

Capital adequacy risk Profitability risk

Liquidity risk FX risk

Mean

Scale

10 5 1


Description:

Macroeconomic risk indicates the level of threats arising in the real

economy or the fiscal area.

Retail and corporate credit risks reflect expected changes in the

share of nonperforming loans in bank loan portfolios and the need for

extra provisions for those loans.

Capital adequacy risk measures the ability of banks to maintain an

adequate level of capital.

Profitability risk measures the ability of banks to generate net profit.

Liquidity risk is a measure of the ability of banks to meet their

liabilities to depositors and creditors in full and on time.

FX risk is the risk that foreign exchange market trends will affect the

resilience of banks.

4 The financial sector risk map was updated in 2021. In particular, its calculations are now based on quantitative indicators. Read more about the calculation methodology in Box 1. New Methodology for Building Financial Sector Risk Map.

0

2

4

6

8

10

Macroeconomicrisk

Retail creditrisk

Corporatecredit risk

Capitaladequacy risk

Profitability risk

Liquidity risk

FX risk

December 2020 June 2021



Box 1. New Methodology for Building Financial Sector Risk Map

From June 2021, the NBU changed the methodology used to construct its financial sector risk map. The methodology is now

based only on quantitative risk indicators. The list of risks has also been updated, with financial risks now including

macroeconomic risk. The new risk map reflects risk assessments over a horizon of the next 12 months.

A risk map is an analytical tool for detecting, analyzing, and

visualizing risks to the financial system. Around the world,

regulators responsible for financial stability often develop and

publish their own risk maps. However, the contents of each

risk map differ, depending on the specifics of each country’s

financial system and the needs of the risk map’s users. The

NBU has been publishing its risk map since 2015. Formerly,

the assessments relied heavily on expert judgments by NBU

staff. In 2021, this tool has been reworked to take into account

the risk map methodology used by other central banks. Thus,

the assessments will from now on depend only on

quantitative indicators.

Since Ukraine’s financial system is bank-centered, and only

banks carry systemic risks, the risk map is based on banking

sector risks. The updated risk map also includes

assessments of macroeconomic risk.

When building the risk map, the NBU referred to a wide range

of indicators used by other central banks, supplemented by

indicators that are specific to Ukraine. The final list of

indicators is made up of those able to provide an early signal

that risks will build up and materialize in the next year. Each

risk group contains four to seven indicators.

The values of multi-format indicators were normalized to

conform to a common scale, with the various risk

assessments being marked in different colors. The highest

assessment is 10 (dark red), which signals that the risk is

major. The lowest assessment is 1 (dark blue), which

indicates that the risk is negligible. Each indicator was

assigned ten ranges of values, which correspond to the

relevant assessments. The ranges were set in a way that

ensures an even distribution of the historical values of

indicators within the ranges. In order to improve assessment

accuracy, data from peer countries (emerging markets and

trading partners) were sometimes used, following the same

principle. The resulting color pattern makes it easy to interpret

the level of risk for each indicator.

Finally, the assessments of the indicator groups were

averaged in order to obtain a score for each type of risk. The

aggregated mean average for all of the risks was then

calculated in the same way. In future, the risk map will be

used in the usual abbreviated format, presented as a

breakdown by risk.

Table 1. Risk map indicators

Risk Indicator 2015 2017 2019 03.21

Macroeconomic risk

Real GDP change, yoy Real GDP change forecast, yoy Gross external debt to GDP Current account balance to GDP Public and publicly guaranteed debt to GDP Budget deficit to GDP Price of 5-year CDS sovereign Eurobonds

Retail credit risk

Gross retail bank loans to GDP Gross retail bank loans to disposable income Debt service-to-income ratio Share of loans past due for more than 30 days Index of economic expectations Expected change in the quality of retail loans*

Corporate credit risk

Net corporate bank loans to GDP Gross debt to EBITDA Return on capital Interest coverage ratio Share of company defaults Business outlook index Expected change in quality of corporate loans*

Capital adequacy risk

Regulatory capital adequacy ratio Core (Tier 1) capital adequacy ratio Net nonperforming loans to capital Capital to net assets

Profitability risk

Return on capital Return on assets Net interest margin Cost-of-risk Cost-to-income ratio

Liquidity risk

LCR (all currencies) Share of high-quality liquid assets Net loans to deposits Expected change in liquidity risk*

FX risk

Volatility of UAH/USD exchange rate International reserves to imports Share of bank FX loans issued to corporates Net open currency position to regulatory capital Depreciation expectations of businesses Depreciation expectations index of households Change in FX risk of banks*

Scale 1 2 3 4 5 6 7 8 9 10 lower risk higher risk

* According to the Bank Lending Survey.


https://bank.gov.ua/admin_uploads/article/FSR_2020-H2_eng.pdf?v=4#page=42

https://bank.gov.ua/en/news/all/opituvannya-pro-umovi-bankivskogo-kredituvannya-ii-kvartal-2021-roku



3.2. Capital Adequacy Risks

The crisis has not shaken the financial resilience of the banks, as they have retained substantial capital cushions sufficient to

cover the main risks. Of course, certain risks to capital persist, but they are not systemic in nature and arise from the inefficient

operations of some institutions. At the same time, given the economic recovery, the re-introduction of the capital requirements

– the implementation of which was postponed last year – is back on the agenda. The main requirement is to re-impose capital

buffers. As can be seen from the current high profitability of the sector, most banks can easily build capital conservation and

systemic importance buffers within a year. The banks already have capital cushions that exceed minimum requirements.

Therefore, the NBU will soon decide on a convenient schedule for the banks to build capital buffers.

Figure 3.2.1. Distribution capital adequacy ratio by banks’ assets

The banks’ capital adequacy remains high

The banking sector’s capital adequacy has been well above

the minimum level for several years running. In May, the

weighted average core capital adequacy ratio stood at

17.9%, having increased by 1.2 pp since the start of the year.

Profits have been the main source of the banks’ capital in

recent years. Capital growth, generated by large profits,

markedly exceeded the growth in risk-weighted assets. The

solvency margin of most banks did not decrease even in the

face of the crisis. The state-owned Ukreksimbank was the

only large bank that had to raise funds from shareholders.

That said, the bank’s insufficient capital was the legacy of

previous crises, rather than fallout from the coronavirus crisis.

The banks should hold capital in excess of minimum

requirements

Before the onset of the coronavirus crisis, Ukrainian banks

had to gradually build capital buffers in excess of minimum

requirements. These were the capital conservation buffer of

2.5% of risk-weighted assets for all banks, and the systemic

importance buffer of 1% to 2% for systemically important

banks. These buffers, built of core capital instruments in good

times, can be used by banks to absorb losses in bad times.

The capital conservation buffer decreases the risk that a bank

fails to meet the minimum capital adequacy requirement in

the future. The additional systemic importance buffer

enhances the ability of systemically important banks to

absorb losses, thus reducing the probability of crises and the

extent of their consequences for the system. The banks must

hold these buffers at all times: according to generally

accepted practices regulators do not deactivate such buffers

in bad times. At the same time, these buffers can be used to

absorb losses. If a bank breaches the buffers due to heavy

losses it incurred in a crisis, no sanctions are imposed on the

bank. However, the breach triggers tight restrictions on

capital distributions, in particular dividend payments. In this

light, the buffers act as a soft stimulus for banks to augment

their capital by retaining their profits.

In early 2020, the NBU cancelled the requirement that the

banks build both buffers because of the economic crisis. The

introduction of the buffers was postponed until better times.

The banks were recommended to retain their capital rather

than distributing it as dividends.

Source: NBU.

Figure 3.2.2. Banks’ distribution by the core capital adequacy ratio above the minimum requirements, as of April 2021

Source: NBU.

0%

20%

40%

60%

80%

100%

03.19 06.19 09.19 01.20 03.20 06.20 09.20 01.21 04.21

<7% 7–9.5% 9.5–12% 12–15% >15%

0%

20%

40%

60%

80%

<2.5% 2.5–5% 5–10% >10% <2.5% 2.5–5% 5–10% >10%

By number By assets

Systemically important banks Other banks



Figure 3.2.3. Share of 2020 profits, distributed as dividends, and core capital adequacy ratio less declared dividends

The banks effectively have the required capital buffers,

despite the buffers being postponed

Although there is currently no requirement that the banks

build and hold capital buffers, 88% of Ukraine’s banks in

effect have capital conservation buffers. What is more, the

current capital adequacy of all systemically important banks

exceeds the total of the minimum required amount and the

two buffers: the capital conservation and systemic

importance buffers. This indicates that the banks are applying

reasonably conservative approaches to capital planning,

which they should retain in future.

The banks’ dividend policies also show that the banks have a

well-established practice of holding capital above the

required minimum amounts. The economic recovery that

started in H2 2020 enabled the banks to more accurately

assess the credit losses they incurred because of the crisis.

This also enabled the banks to update their capital needs

estimates. Given the updates, some banks decided to pay out

dividends. Nevertheless, even those banks that distributed

their profits as dividends retained substantial capital cushions

in excess of the minimum regulatory requirements. This

means that when planning their capital, the banks are already

trying to set aside capital as buffers.

The banks will need the capital cushions they have

accumulated to meet the revised regulatory requirements.

Already starting from 1 July, risk weights for unsecured

consumer loans will increase from the current 100% to 125%,

and will rise to 150% from 1 January 2022. In addition, on 1

January 2022, the NBU will introduce minimum capital

requirements to cover operational risk. The fact that the

banks were able to navigate through the crisis smoothly,

coupled with their high profitability, signifies that the

introduction of these new requirements is properly timed, and

will not put any excessive pressure on the financial

institutions. Moreover, the banks’ capital adequacy will be

well above the minimum requirements even after the

introduction of the above changes.

High profits are enabling the banks to meet buffer

requirements while also actively lending

It is important to ensure that during the economic recovery,

when the economy needs additional credit resources, the

banks are able to increase their capital buffers without

slowing down lending. That is why the NBU calculated how

much time the banks need to build their capital conservation

buffers while also expanding their loan portfolios by 15%

every year. The calculations assumed that the banks’ ROA

would remain at the average level of the last two years. For

the system as a whole, this figure exceeds 3%. It was also

assumed that the estimated profit for each year was used

exclusively to increase the capital, and that no dividends were

paid out.

Most banks will not require more than one year to form their

capital conservation buffers in full. These banks account for

51% of the sector’s total assets. Banks that account for 30%

of the sector’s assets will either be unable to build capital

The size of the circle corresponds to the return on equity (ROE).

Source: NBU.

Figure 3.2.4. Banks’ distribution in terms of the core capital adequacy ratio before and after the planned regulatory changes* by the share in the sector’s net assets

* Planned regulatory changes include capital requirements for operational risk and higher risk weights for unsecured consumer loans.

Source: NBU.

Figure 3.2.5. Change in the core capital adequacy requirements from January 1 2020 to May 1 2021 and the average return on assets for 2019–2020

Data of 25 largest banks (excluding Russian banks).

Source: NBU.

0%

20%

40%

60%

80%

100%

120%

0% 10% 20% 30% 40% 50%

Dis

trib

ute

d s

ha

re o

f p

tofit

Core capital adequacy ratio

Private State-owned Foreign

Minimum required core capital adequacy ratio and capital conservation buffer

0%

10%

20%

30%

40%

50%

60%

<7% 7–9.5% 9.5–12% 12–15% >15%

On 1 May 2021 Evaluation after regulatory changes

-4%

-2%

0%

2%

4%

6%

8%

10%

0% 2% 4% 6% 8% 10%

Ch

an

ge

in

co

re c

ap

ita

l ad

eq

ua

cy

req

uirem

en

ts fro

m 1

Ja

n 2

02

0

ROA



Figure 3.2.6. Banks’ distribution by timespan needed for building a capital conservation buffer

buffers themselves due to incurring losses, or will need more

than three years. This category comprises two state-owned

banks. However, the estimates for these banks are less

relevant, as they are based on their historically low

profitability, and do not take into account the ongoing

transformations of these banks’ business models. The

remaining banks will need from one to three years to build

capital buffers. Therefore, on average, the banks will be able

to build their capital conservation buffers in 15 months,

maintaining their current profitability and ensuring portfolio

growth much higher than it is now. The difficulties some

banks might have with building their capital buffers arise

neither from the state of the banking sector nor the

macroeconomic environment. Rather, they result from their

perennial problems: low asset quality and operational

inefficiency.

In this light, the NBU will soon be in the position to decide on

the schedule for reintroducing buffer requirements. In future,

the central bank will follow common practice, which does not

provide for the deactivation of buffers during crises.

The NBU continues to introduce new elements to the

banks’ capital management system

The challenges that the banks will face in the coming years

will require them to hold sufficient capital to cover their

operational and market risks, as well as increased risk

weights for unsecured consumer loans. The banks will also

be required to deduct the value of noncore assets from their

capital and to adopt a new capital structure. Constant losses,

low efficiency and large concentrations of noncore assets

pose a threat to the capitalization of some banks, preventing

them from generating capital on their own.

This year’s stress tests, the results of which will come out in

late 2021, will identify potential threats to the banks’ capital.

As usual, the stress tests will include two scenarios – the

baseline and adverse ones – and will cover credit, interest

rate and FX risks. Because of the crisis seen in 2020, the

adverse scenario assumes a moderate but prolonged

economic downturn. For the first time, the stress tests will

include the risk that the banks sustain losses from a fall in the

value of domestic government debt securities due to a rise in

securities’ yields under unfavorable macroeconomic

conditions. The NBU will take stress test results into account

when deciding on the schedule for introducing capital buffers.

The banks should now start factoring in future requirements

when planning their capital. These requirements mainly

consist of increased minimum capital requirements and

capital buffers. On top of the regulator’s requirements, the

banks should also factor in specific risks when planning their

capital. The internal capital adequacy assessment process

(ICAAP), which is planned to begin in test mode in 2022, will

enhance the effectiveness of capital planning.

Source: NBU.

Figure 3.2.7. Banks’ distribution by net assets depending on the time needed to build the capital conservation buffer

Source: NBU.

Figure 3.2.8. Banks’ distribution by the acceptable loans’ annual growth rate with a 2-year capital conservation buffer accumulation

Source: NBU.

0%

5%

10%

15%

20%

25%

lessthan 3mon.

3–6 mon.

6–12 mon.

1–2 years

2–3 years

Morethan 3years

Can notbuild the

buffer

By number By assets

0%

5%

10%

15%

20%

25%

Lessthan 3mon.

3–6 mon.

6–12 mon.

1–2 years

2–3 years

Morethan 3years

Can notbuild the

buffer

State-owned banks Other banks

0%

10%

20%

30%

40%

50%

60%

Can not buildthe buffer

Less than 10% 10–20% More than 20%

By number By assets

https://bank.gov.ua/en/news/all/natsionalniy-bank-zatverdiv-pidhid-do-stres-testuvannya-bankiv-u-2021-rotsi



Box 2. The Internal Capital Adequacy Assessment Process (ICAAP)

The NBU continues to implement European capital requirements. The banks’ implementation of the internal capital adequacy

assessment process (ICAAP) is an important element of these requirements. The ICAAP will be launched in test mode in

2022. Further on, the ICAAP should enhance the effectiveness of the banks’ capital planning, while also improving the quality

of banking supervision.

The Basel Committee on Banking Supervision (the BCBS)

laid down the basic principles of modern banking supervision

in standards it set in 1988. These standards set out uniform

minimum capital requirements. Over time, the development

of the banking sector and the greater complexity of banking

operations revealed shortcomings in these requirements. For

one thing, meeting the minimum requirements does not cover

the specific risks faced by individual banks. That is why in

2004 the BCBS proposed revised requirements, known as

Basel II, which comprises three pillars. Pillar I sets out

minimum requirements. Pillar II outlines the process of

banking supervision (the SREP according to the EU

approach), during which the regulator assesses the risks of a

bank, and can set additional capital and liquidity requirements

for individual banks. Pillar III established standards for market

discipline and the transparency of banks’ activities.

According to SREP methodology, supervisors focus on four

areas when assessing banks. First, supervisors assess the

viability of a bank’s business model and development

strategy. Second, regulators look closely at a bank’s

corporate governance and internal controls. Third, they

assess whether a bank has sufficient capital to comply with

regulatory and supervisory requirements and to absorb all

substantial risks, apart from those covered by Pillar I. Fourth,

supervisors assess liquidity risks.

When assessing whether or not a bank has sufficient capital

to cover all material risks, a regulator must ensure that:

the minimum capital requirements adequately cover the

bank’s credit, market, and operational risks

the bank has sufficient capital to cover all of its other

material risks

the bank will have enough capital to remain solvent even

if adverse events materialize

the bank’s capital risk management system has no

serious shortcomings, or the bank holds sufficient capital

to minimize any adverse effects from such shortcomings.

A bank’s own assessment of its capital is an important input

of the supervisory assessment of capital adequacy. The

ICAAP is an internal exercise whereby banks assesses the

amount of capital they need to implement their strategy over

a three-year horizon, taking into account all substantial risks

and stress scenarios. In addition, banks assess the

effectiveness of some of their business lines, factoring in the

risks that arise from them, and can reallocate available capital

between business lines most effectively. If necessary, banks

can plan to raise capital in advance. Therefore, the ICAAP

provides significant inputs for the effective implementation of

the SREP, while also being important for effective capital

management and a bank’s understanding of its risks.

The ICAAP integrates two perspectives – the economic and

the normative ones. Under the economic perspective, banks

quantify all of their risks. This means that banks calculate the

amount of capital that can adequately cover their potential

losses from risks over a one-year horizon with a high level of

confidence. Banks can select the methodology and relevant

assumptions for their assessment, while also being required

to take into account significant planned changes in their risk

profile. Apart from making an assessment under a baseline

scenario, banks must assess their risks under stress

conditions. Then banks sum up the assessment of all material

risks made separately under the baseline and shock

scenarios, with the larger assessment determining the

required capital under the economic perspective. This

required amount must be fully covered by available core

capital.

Under the normative perspective, banks assess their ability

to meet regulatory capital adequacy requirements over a

three-year horizon. This assessment is based on two

scenarios: a baseline one (envisaging the implementation of

a bank’s strategy) and an adverse one. Adverse scenarios,

which are developed by banks, must assume the

materialization of low-probability crisis events that are

relevant for a specific bank, while also identifying the bank’s

material risks. Banks must hold sufficient available capital to

meet regulatory requirements under both scenarios.

Therefore, the economic perspective is more bank-specific,

with the capital calculated under this perspective being

sufficient to cover unexpected losses with a high confidence

level. In contrast, the normative perspective provides a

rougher assessment of a bank’s ability to meet regulatory

requirements under any conditions. The perspectives are

interrelated, and their assessments of risks and losses should

be comparable. If a bank identifies a certain level of risk under

the economic perspective, it must show a comparable sum of

losses from this risk under the normative perspective.

Significant discrepancies between assessments of the same

risks may indicate that the models used were of poor quality,

or that underlying assumptions were flawed. Therefore,

banks must compare the outputs under both perspectives,

ensuring they are consistent.

As part of the ICAAP, banks are required to draw up plans to

maintain sufficient capital under both perspectives. The

ICCAP also provides for the following capital management

measures: the assessment of risk-adjusted return on

business processes, the allocation of capital between

business lines depending on this return, setting justified limits

on operations, and other measures. The ICAAP is essentially

a continuous process, as capital adequacy must be

constantly monitored, and all calculations must be updated in

a timely manner.

In Ukraine, the ICAAP will be launched in test mode starting

in 2022. The banks will be given about a year to prepare for

the full introduction of the requirements from 1 January 2023.

After that, ICAAP outcomes will feed into the SREP.



3.3. Retail Lending Risk

Having shrunk during the crisis, the retail portfolio of the banks is growing significantly. Its monthly growth rate now even

exceeds its pre-quarantine pace. Most noticeable is the surge in mortgage lending, although this portfolio is still quite small.

Despite the effects of the crisis, the quality of the portfolio remains acceptable, while the NPL ratio is actually declining. In the

retail lending market, the segmentation of financial institutions is noticeable. Those working mostly with unsecured loans for

current needs are now seeing the highest returns, but are also facing higher risks. Several banks are already placing a

particular focus on mortgage lending. The rest are focusing on several areas at once.

Figure 3.3.1. Net hryvnia retail loans, UAH billions Retail lending is picking up

The breakdown of the retail loan portfolio has been stable for

a long time. As before, most of it is made up of unsecured

consumer loans. These account for 85%. Car loans make up

a further 9%, and the remaining less than 7% are mortgages.

All three segments actually grew during the crisis, and this

growth has accelerated since the start of 2021. The monthly

growth rate of the unsecured portfolio recently approached its

pre-quarantine level. However, these indicators fall

significantly during the periods of strict quarantine. In April,

this part of the retail portfolio grew by 15% yoy. The car loan

portfolio is also growing at a similar pace. Mortgages are

growing even more dynamically.

Today, the prerequisites are in place for the retail portfolio to

continue to grow rapidly. The banks note an increase in the

demand for loans, including record-high demand for

mortgages. In the mortgage segment, this trend is driven by

lower interest rates and expectations of the development of

the real estate market, while in the retail lending segment

demand is fueled by upbeat consumer sentiment.

The retail lending market remains clearly segmented

The banks that actively lend to households fall into three

groups. The first specializes in unsecured consumer loans –

mostly card-based and cash ones5. This group’s portfolio has

almost no other products. PrivatBank is also in this group.

This bank also leads the way in mortgage lending, but its

volume of mortgages is still too small in comparison to its total

portfolio, and does not determine its business model. The

second group of banks focuses on mortgage lending. For the

most part, they combine mortgages with car loans. These

banks also have unsecured consumer loans in their portfolio,

or loans secured by titles to unbuilt real estate. The third

group includes banks that are active in both the retail and

corporate lending markets. Mortgages as a share of their

portfolio are not significant: The core of their portfolio is made

up of unsecured loans, or car loans. In group three, only the

state-owned Ukrgasbank and Oschadbank are actively

increasing their share of mortgages.

Banks’ focus on segments defines their operating and

financial priorities

The breakdown of the loan portfolio largely determines the

profitability of the banks. Unsecured consumer loans come

with the highest interest rates. The banks for which these

loans make up most of their portfolio have the highest net

interest margin. In 2020, this margin actually increased: the

rates on these loans practically did not decline, while the cost

At solvent banks as of 1 May 2021.

Source: NBU.

Figure 3.3.2. Month-on-month change in net loans

Source: NBU.

Figure 3.3.3. Distribution of banks* by share in loan portfolio (retail and corporate) of unsecured consumer loans and mortgages, as of 1 May 2021

* At 17 largest banks in terms of net retail loans.

Source: NBU.

5A cash loan is a loan whereby a bank issues a one-off amount of cash or noncash credit, as specified in a loan agreement

15.0%

26.8%

0%

10%

20%

30%

40%

0

50

100

150

200

12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.20 03.21Loans for real estate purchase or reconstructionOther loansChange in net credit, yoy (r.h.s.)Change in loans for house purchase, yoy (r.h.s.)

-6%

-4%

-2%

0%

2%

4%

6%

8%

12.19 02.20 04.20 06.20 08.20 10.20 12.20 02.21 04.21

Mortgages Car loans Other loans

Strict quarantine restrictions

0%

5%

10%

15%

20%

0% 20% 40% 60% 80% 100%

Mo

rtg

ag

es

Unsecured consumer loans

Unsecured consumer

Mortgages

Universal

https://bank.gov.ua/admin_uploads/article/BLS_Q2-2021_eng.pdf?v=4



Figure 3.3.4. Distribution of banks* by share of unsecured consumer loans in portfolio (corporate and retail) and net interest margin, as of 1 May 2021

of funding fell significantly. The higher margin is in part due

to the need to cover higher credit risks: last year, average

loan loss provisions were significantly higher for the banks

focusing on this segment. These loans are mostly short, so

the banks need to constantly issue new loans to maintain the

size of their portfolio and earn a stable income. In EU

countries, the ratio of unsecured consumer loans to GDP

approaches 10%. In Ukraine, it stands at about 4%.

Therefore, there is significant potential for an increase in

loans made by both the banks already operating in this

segment, and by the ones that are planning to enter it.

However, this segment may reach saturation in a few years,

significantly reducing room for its long-term growth.

Rates on mortgages and car loans are much more sensitive

to macroeconomic conditions and the overall level of market

interest rates. The decline in lending rates over the past year

has significantly increased demand for these loans. The

financial institutions dealing with mortgages and car loans

have a much more modest net interest margin. As these

loans usually have longer maturity, they provide banks with a

more stable income, although they carry higher interest rate

risks. At the same time, mortgage lending offers significant

potential. Ukraine’s ratio of mortgages and car loans to GDP

is less than 1%. Even with the current high rate of portfolio

growth, it will take decades to bring this figure closer to the

EU average.

Retail loan portfolio quality is acceptable

Despite the crisis, the quality of the retail loan portfolio

remains acceptable. The NPL ratio has significantly declined

since October 2020: the banks are writing off their NPLs and

actively replenishing their portfolios with new loans, the

quality of which is mostly high. There is no significant

migration of loans between IFRS 9 stages or between

prudential classes. Such a migration would have indicated a

deterioration in portfolio quality. Provisioning, which

increased significantly at the peak of the crisis, has declined

slightly since then. In recent months, it has remained at about

4.5%, which is almost the same as the assessment of credit

risk under prudential requirements.

When the pandemic broke out, the NBU allowed banks not to

recognize as nonperforming those loans that had been

restructured by the banks due to the financial difficulties of

debtors. According to surveys of the financial institutions,

such loans accounted for 8% of the portfolio. This share

depended largely on the type of loan. Loans for the purchase

of home appliances and card overdrafts made up the smallest

portions of the portfolio. The average size of restructured

loans is 1.5 to 2 times higher than the average loan size in

the portfolio. Effective May 2021, the banks must assess the

risk of these loans in line with the general rules. Therefore,

the attention of the financial institutions should be focused on

the quality of this essential part of the portfolio.

Given the economic recovery and income growth, a

significant increase in credit risks in the retail portfolio should

not be expected in the near future. This is evidenced by the

acceptable debt burden of borrowers and the more moderate


Source: NBU.

Figure 3.3.5. Equilibrium level of consumer loans and changes in Consumer Loans/GDP ratio

Paper by Csajbok, A., Dadashova, P., Shykin, P., Vonnak, B. (2020). Consumer Lending in Ukraine: Estimation of the Equilibrium Level. Visnyk of the National Bank of Ukraine, 249, 4–12.

Source: NBU.

Figure 3.3.6. Composition of retail loan portfolio and cost-of-risk ratio, by individual banks*


Source: NBU.

0%

10%

20%

30%

40%

0% 20% 40% 60% 80% 100%

Ne

t in

tere

st m

arg

in

Share of unsecured consumer loans in portfolio

Unsecured consumer loans Universal Mortgages

0%

3%

6%

9%

12%

15%

18%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Estimated equilibrium path

Bounds

Consumer loans to GDP

Forecast bounds

Adjustment path

Forecast

0%

6%

12%

18%

24%

30%

0%

20%

40%

60%

80%

100%

Car loans Loans for house purchase

Other loans Cost-of-risk (r.h.s.)



Figure 3.3.7. Credit risk of the performing retail portfolio post-crisis lending standards (see Box 3. Household Debt

Burden Remains Acceptable). Starting 1 July, the

requirements for higher risk weights for the retail portfolio’s

most risky part – unsecured consumer loans – will take effect.

These weights will first be raised from 100% to 125%, and

then, on 1 January 2022, to 150%. As a result, the banks will

build up an additional capital to cover the risks of this

segment. The credit risk of the portfolio will be assessed in

the annual stress test, the results of which will be published

at the end of the year. Perhaps the most important tool for

mitigating the risks today is for the banks to properly assess

them, and to pursue a prudent credit policy. This is especially

true for banks that hold the bulk of their portfolio in retail

loans, and earn most of their income from such loans.

Source: NBU.

Figure 3.3.8. Share of loans restructured due to the fallout from the pandemic, by borrower income group

Source: banks, NBU estimates.

4.5%

0%

1%

2%

3%

4%

5%

6%

12.18 04.19 08.19 12.19 04.20 08.20 12.20 04.21

Credit risk under prudential requirements

Expected losses under IFRS 9

Strict quarantine restrictions

0%

5%

10%

15%

20%

Under UAH 7 thnd Over UAH 7 thnd Unknown income

Overdrafts Instalments on appliances

Instalments on a car Others

35%



Box 3. Household Debt Burden Remains Acceptable

In Q1 2021, the NBU conducted another regular survey of banks to assess the characteristics of their customers, in terms of

their level of income6. The survey focused on unsecured consumer loans. It covered 25 banks, which together issued 95% of

this type of loan. The survey showed that banks are shifting toward lending to borrowers with higher incomes, with the debt

burden remaining mostly acceptable.

The coronavirus crisis significantly slowed the growth in

consumer lending. The number of borrowers decreased. In

particular, writing off old, nonperforming loans reduced the

number of borrowers about incomes of which banks had no

information. The number of active borrowers who have

provided banks with the necessary information about their

income grew by only 2% over the year. The average amount

of debt grew unevenly for borrowers with different income

levels. The average loan amount increased the most for

borrowers earning UAH 7,000 to UAH 20,000. At the same

time, the average loan amount declined markedly for

customers with higher incomes.

In early 2020, lending was subdued by a worsening in

consumer confidence and a temporary decline in

consumption. In addition, the banks enhanced their

consumer lending standards at that time, which they reported

in the Bank Lending Survey in Q1 and Q2. During the crisis,

financial institutions were concerned about a potential

deterioration in borrower solvency. Therefore, the banks

revised down their credit limits and approved fewer loan

applications. Overall, the share of loans past due for more

than 60 days grew across all borrower groups in 2020. This

growth was quite even, at around 1 pp for each customer

income group. The category of low-income borrowers had the

largest share of past due loans.

Figure В.3.1. Average amount of a loan for current needs per borrower depending on income, UAH thousands


In recent years, the banks have shifted to lending to

borrowers with higher incomes. This tendency strengthened

during the coronavirus crisis. In 2020, the share of loans

issued to borrowers earning more than UAH 20,000 per

month increased from 30% to 43% of the total. The number

of the loans also rose noticeably, although it is still small

compared to other categories. On the other hand, the volume

6 Respondent banks provided information about their borrowers as a breakdown by the following income groups: under UAH 7,000, UAH 7,000–20,000,

UAH 20,000–50,000, and over UAH 50,000. The borrowers’ income reflected in the breakdown had to be confirmed by the relevant documents. If the documents were not available, banks placed borrowers in a separate group with “unknown income.”

of loans issued to customers with a monthly income of less

than UAH 7,000 dropped to a record low. In part, this was

explained by an increase in borrowers’ income and their

moving into the next group. The number of debtors in this

group fell by 23% over the year.

Figure В.3.2. New loans for current needs by income groups of borrowers


At the same time, the share of new loans issued without

information about borrowers’ income and the volumes of such

outstanding debts decreased. In this borrower category, 27%

of loans were past due for more than 60 days.

Figure В.3.3. Loan portfolio for current needs by income groups of borrowers


Before the crisis, the debt burden increased across the

majority of groups. The main measure of the debt burden is

the ratio of monthly debt servicing expenses to monthly

income – the Debt-Service-to-Income (DSTI). This indicator

was the highest for borrowers earning less than UAH 7,000.

It even exceeded 40% in 2019, but returned to a lower level

0%

2%

4%

6%

8%

10%

0

10

20

30

40

50

Up to 7 UAHthnd

7–20 UAH thnd

20–50 UAH thnd

Over 50 UAHthnd

Average amount of debt at the end of 2019Average amount of debt at the end of 2020Share of 60+ days overdue payments at the end of 2019 (r.h.s.)Share of 60+ days overdue payments at the end of 2020 (r.h.s.)

0%

20%

40%

60%

80%

100%

2017 2018 2019 2020 2017 2018 2019 2020

Number of borrowers New loans for current needs

Up to 7 UAH thnd 7–20 UAH thnd 20–50 UAH thnd

Over 50 UAH thnd Unknown income

0%

20%

40%

60%

80%

100%

Number ofborrowers

Loans forcurrent needs

60+ daysoverdue

payments

Number ofborrowers

Loans forcurrent needs

Outstanding loans on 1 Jan 2021 New loans in 2020

Up to 7 UAH thnd 7–20 UAH thnd 20–50 UAH thnd

Over 50 UAH thnd Unknown income




last year. The debt burden of borrowers earning more than

UAH 20,000 increased the most. Nevertheless, their debt

servicing expenses are acceptable, accounting for less than

one third of their declared income.

Figure В.3.4. Debt burden on borrowers by income group

The Debt-Service-to-Income ratio (DSTI) is the ratio of monthly debt servicing expenses to average monthly income. The Debt-to-Income (DTI) ratio is the ratio of debt to annual income.


Over the year, the share of overdrafts on credit cards

increased markedly across all borrower income groups. This

is the main type of loan in the consumer loan portfolio. Car

loans are mostly taken by customers with higher incomes. On

the other hand, borrowers who earn less borrow money to

buy home appliances more often. The average sizes of

overdrafts and consumer loans to buy home appliances are

comparable, at UAH 12,000–13,000. The higher a borrower’s

income, the larger is the average debt. Car loans averaged

UAH 370,000.

Figure В.3.5. New loans portfolio by income groups of borrowers, UAH billions


As usual, the majority of borrowers are employees. Retired

people and the unemployed are only prominent in the

category of borrowers earning less than UAH 7,000 – they

account for a third of this group. The share of sole proprietors

who took out loans for current needs not related to their

entrepreneurial activities also decreased over the year.

Figure В.3.6. Distribution of borrowers number by employment category


The latest portfolio developments show that the banks have

become more attentive to their borrowers’ incomes and debt

burden. This is evident from the drop in the share of

borrowers about incomes of which banks had no information,

the shift toward customers with higher incomes, and the

persistence of acceptable borrower debt burden. According

to the Lending Survey, the banks have significantly improved

their estimates of the household debt burden since the start

of 2020.

Figure В.3.7. Actual indicators and banks’ estimates of household debt burden

* The values reflect the balance of responses to the question “What was the debt load of households in the quarter that has just ended?” in the questionnaire of the quarterly Bank Lending Survey. Positive values mean a high debt load.

Source: banks’ data, NBU.

0%

10%

20%

30%

40%

50%

01.18 01.19 01.20 01.21 01.18 01.19 01.20 01.21

DSTI DTIUp to 7UAH thnd

7–20 UAH thnd

20–50 UAH thnd

Over 50UAH thnd

0

10

20

30

40

50

60

Up to 7 UAHthnd

7–20 UAH thnd

20–50 UAH thnd

Over 50UAH thnd

Unknownincome

Ти

сячні

Overdrafts Installments for cars

Installments for appliances Others

0%

20%

40%

60%

80%

100%

01.20 01.21 01.20 01.21 01.18 01.21 01.18 01.21

Up to 7 UAHthnd

7–20 UAH thnd

20–50 UAH thnd

Over 50 UAHthnd

Employee Sole proprietor Unemployed of working age Pensioner

-20

-10

0

10

20

30

40

-10%

-5%

0%

5%

10%

15%

20%

2017 2018 2019 2020 2021Debt burden estimates by banks* (r.h.s.)

Gross loans / GDP

Gross loans / Disposable income

DTI, average




Box 4. New Impetus to Resolving the Issue with FX Mortgages

The banks have been tackling the problem of legacy FX mortgages for over ten years. In April 2021, parliament passed a law

requiring lenders to restructure loans at a borrower’s request. Although the law offers favorable condit ions for borrowers, the

extension of the moratorium on FX mortgage foreclosures is discouraging borrowers from repaying their debts.

In April 2021, the banks had FX mortgages worth slightly over

USD 400 million on their balance sheets, 95% of which had

not been serviced for a long time. The low quality of that

portfolio resulted from two crises: the one in 2008–2009, and

the one in 2014–2016. Before the first crisis, mortgage

lending was rising rapidly. Most customers were taking FX

loans, as interest rates on such loans were lower. However,

FX risk was underestimated and materialized when the crisis

struck. The depreciation of the hryvnia increased the debt

burden of borrowers. During the 2008–2009 crisis, the

percentage of NPLs in this segment moved up from 1% to

13%. Consumer FX lending has been prohibited since 2009.

Figure В.4.1. Mortgage portfolio to GDP ratio

* GDP estimates for 2021 from the NBU’s April 2021 Inflation Report.

Source: SSSU, NBU.

Over the next five years, the FX mortgage portfolio shrank by

almost three times, mainly due to the repayment of

performing loans. In early 2014, the banks still had FX

mortgage loans worth about USD 4 billion on their balance

sheets, of which only half were performing loans. The

depreciation and the fall in income seen in 2014–2016

caused another wave of defaults on these loans. At that time,

parliament imposed a moratorium on FX mortgage

foreclosures to prevent insolvent borrowers being evicted

from their houses. The moratorium discouraged borrowers

from servicing their loans and looking for ways to pay off their

debts. The banks had to recognize almost all loans as non-

performing and to report losses. The banks cleared their

balance sheets of these loans by writing them off or selling

them at large discounts. Since 2014, the FX mortgage

portfolio has contracted by almost ten times.

The moratorium was supposed to last until special legislation

on restructuring FX loans was passed. In October 2019,

parliament adopted a bankruptcy code (the code), which sets

out the restructuring procedure. It required the banks to

calculate unpaid loan portions and to multiply them by the

current housing price to obtain a new amount of outstanding

debt. The difference between the debt amounts before and

after restructuring was to be forgiven. The code also

established the date on which the moratorium was to be lifted

– October 2020. However, this mechanism turned out to be

unpopular because the moratorium was still in effect and the

forgiven portion of the debt was taxed. Thus, effectively no

restructurings were conducted. Parliament extended the

moratorium until April 2021.

In April, parliament adopted a law that established the

mechanism for mandatory restructurings of FX mortgages,

and amended the code. The amendments optimized the

existing mechanism, while also maintaining the balance

between the interests of the parties. The restructuring

procedure created preferences for borrowers by:

requiring lenders to restructure debts

converting the debt at an exchange rate that is the

average of the exchange rate that was in effect when the

loan was issued and that in effect when the loan is

restructured

reducing the debt by the amount of previously paid fines,

and by the difference between the interest accrued earlier

at the initial interest rate and that accrued at the UIRD

requiring lenders to also restructure loans secured with

land plots.

Figure В.4.2. Number of applications for restructuring submitted, units

Source: banks’ data.

Although poorly accounting for the banks’ interests, this new

legislation could finally put an end to the perennial problems

with FX mortgages. That said, the restructuring process

started off sluggishly. In May, the banks received only about

120 applications for restructuring. This makes up only half a

percent of all FX mortgages. The small number of

applications for restructuring submitted proves that the

moratorium discouraged most borrowers from engaging in

dialogue with the banks. Applications for restructuring can be

submitted within three months of the law coming into effect –

until 23 July. This means that borrowers still have the

opportunity to submit an application for restructuring,

decrease their debt burden significantly, start servicing their

loans again, and completely eliminate the risk of having their

houses foreclosed on. In turn, the banks should communicate

with their clients, encouraging them to settle their outstanding

debts.

1.9%2.2%

7.9%12.3%

0% 5% 10% 15% 20%

200620072008200920102011201220132014201520162017201820192020

2021*

Gross UAH mortgage to GDP Gross FX mortgage to GDP

0

20

40

60

80

100

120

140

2020 01.21 02.21 03.21 04.21 05.21Under bank’s procedureUnder the CodeFollowing the procedure of mandatory restructuring (Law)



3.4. Real Sector and Corporate Loan Portfolio Quality

A moderate recovery of the real sector is continuing. Although production volumes in the majority of industries have not

reached pre-crisis levels, the financial performance of companies is mostly acceptable. The banks are rather slow in increasing

their corporate lending, mostly being oriented toward high-quality borrowers and maintaining high lending standards. This

approach enabled the banking system to pass through the coronavirus crisis quite smoothly. For lending to continue growing,

real sector companies must do some homework – enhance the transparency of their businesses and improve the quality of

their information disclosure.

Figure 3.4.1. Real sector profitability and share of companies with operating losses The recovery in the real sector is uneven

The global pandemic and the tight lockdown caused a sharp

fall in the revenues of real sector companies in H1 2020. After

restrictive measures were eased in Ukraine and abroad,

sales started to recover, reaching pre-crisis levels for the

majority of industries as early as Q3 2020. Revenue growth

seen in H2 2020 entirely offset the fall that occurred during

the most acute phase of the crisis, pushing total sales of

goods and services up by 4% over the year. However,

companies’ revenues exceeded last year’s levels mostly on

account of the price component, as production physical

volumes were lower than in 2019 across the majority of

industries.

The key drivers of the post-crisis growth in revenues are

strong domestic consumer demand propped up by higher

household income, and favorable terms on global markets. At

the same time, the occasional introduction of tight quarantine

measures and changes in consumer behavior7, including

lower mobility, are restraining the recovery of revenues in the

services sector. Weak domestic investment demand is

affecting some heavy industry sectors. The real sector is thus

recovering unevenly. A large part of the corporate sector is

stable and profitable, but the temporary crisis is transforming

into long-term structural problems for many companies.

In 2020, the average ratio of gross debt to EBITDA increased

to 2.7х, compared to 2.0х last year8. Despite the increase, the

debt burden of most companies is acceptable. This contrasts

with previous crises, when the debt burden was extreme. The

deterioration in the debt burden last year was driven by the

revaluation of foreign currency debts on the back of a

moderate hryvnia depreciation, and by lower corporate

profits. The real sector’s aggregated EBITDA margin was

8.7% in 2020, which is 1.5 pp lower than in 2019. The main

reason behind the decline in operating profitability was that

output dropped while fixed costs remained unchanged.

Nonrecurring expenses, especially from revaluation, also

played a negative role. Although the average debt load is

acceptable, it is still too high for machine-building, real estate,

hotel business, chemical industry, and the supply of electricity

and other utilities.

Consumer demand and high commodity prices are the

key factors for the real sector recovery

Despite the crisis, sectors that directly depend on final

consumer demand increased their revenues last year.

Businesses have adjusted to working under the adaptive

quarantine, which also contributed to a larger turnover of

Source: SSSU, data.gov.ua, NBU estimates.

Figure 3.4.2. Non-financial corporations’ interest coverage by operating profit and EBITDA*, interest rates on new loans

* Data adjusted for outliers.

Source: SSSU, data.gov.ua, NBU, NBU estimates.

Figure 3.4.3. Debt burden in 2020 and EBITDA change from 2019 to 2020, by industries

Data adjusted. * Excluding pipeline transportation.

Source: data.gov.ua, NBU estimates.

7 https://www2.deloitte.com/ua/uk/pages/press-room/press-release/2021/2020-consumer-behavior-in-ukraine.html 8 These data do not capture small companies.

-20%

-10%

0%

10%

20%

30%

40%

50%

-10%

-5%

0%

5%

10%

15%

20%

25%

2013 2014 2015 2016 2017 2018 2019 2020Gross marginEBITDA marginNet income marginShare of companies with negative EBIT (r.h.s.)

0%

5%

10%

15%

20%

25%

0

2

4

6

8

10

2013 2014 2015 2016 2017 2018 2019 2020

EBITDA/Interest expenseEBIT/Interest expenseWeighted average interest rate on FX loans (r.h.s.)Weighted average interest rate on UAH loans (r.h.s.)

Construction

Hotels

MiningCafes and restaurants Light industry

Machine building

Metallurgy

Real estate

Agriculture

Transportation* Food industry

Vegetable oil and fats

Chemical industry

Electricity and other utilities

0

2

4

6

8

10

-100% -50% 0% 50% 100%

Ne

t d

eb

t/E

BIT

DA

Change in EBITDA, yoy

https://www2.deloitte.com/ua/uk/pages/press-room/press-release/2021/2020-consumer-behavior-in-ukraine.html



Figure 3.4.4. Production in key economic sectors goods. The retail trade, food industry, and pharmaceutical

industry increased their revenues over the year. The

pandemic has become the driver of growth in online retail and

delivery services.

The sharp rise in commodity prices significantly increased the

profitability of the two largest exporting sectors in 2020.

EBITDA margin grew by 10 pp, to 8% in the metallurgy, and

by 5 pp, to 23% in agriculture. The positive tendency has

continued up until now. In Q2 2021, the prices of iron ore,

steel, grain and oilseed crops doubled compared to last

year’s minimum values, reaching record highs not seen for

many years.

The positive price trend already affected the financial

performance of the mining and metallurgy in Q1 2021. The

largest producer boosted its EBITDA by more than four times

compared to the previous year. The higher prices for

agricultural output have not yet fully passed through to

corporate profits due to the long production cycle of the

industry. Conditions on global commodity markets are the

decisive factor for Ukrainian exporters (read more in Impact

of Exchange Rate Fluctuations on Exporters). If prices remain

at their current levels, 2021 could be a year of record-high

profits for producers of exported goods.

Some services sectors will not be able to restore their

revenues to pre-crisis levels

The services sector, in particular cafes and restaurants,

shopping malls, passenger transport, tourism, and the

hospitality sector, were affected the most by the quarantine.

Passenger transportation has not yet fully returned to normal

due to regional quarantine restrictions. Hotels’ revenues

shrank last year and in Q1 2021. These sectors might not be

able to fully recover until all of the quarantine restrictions are

lifted. On the other hand, the majority of cafes and restaurants

were open during the adaptive quarantine. Visits to cafes and

restaurants dropped significantly, but food delivery volumes

increased. This positively impacted sales, which rose by

11% yoy in Q1 2021. Revenues of mobile operators and

internet providers also grew.

Demand for loans is increasing thanks to small

businesses

In the aftermath of the active phase of the crisis, lending

volumes have been rising moderately but steadily. Since the

start of the year, hryvnia corporate loans increased by 6%

gross and 10% net. Volumes of foreign currency corporate

loans remained almost unchanged. The smaller difference

between hryvnia and foreign currency interest rates

contributes to the dedollarization of corporate portfolios. If

financial stability lasts, the share of foreign currency lending

will continue to decline.

The pace of lending was the fastest in the segment of small

and micro businesses. Volumes continued to increase

during the coronavirus crisis. Over the past 12 months, the

net portfolio of these customers grew by 26%, to UAH 93

billion9. The state program of interest compensation and the


Figure 3.4.5. Sector contribution to the annual change in sales of industry and services


Figure 3.4.6. Quarterly EBITDA of the largest exporters and change in commodity prices

* 12.2017 = 100. ** Steel Billet Exp FOB Ukraine (12.2017 = 100).

Source: companies’ data, FAO, Thomson Reuters, NBU.

9 The indicator does not include small companies that belong to large business groups or with outstanding amount of over UAH 100 million.

-30% -20% -10% 0% 10% 20% 30%

Retail

Chemical industry

Light industry

Machine building

Metallurgy

Supply of electricity

Processing industry

Industry

Mining

Freight transp.

Pharmaceuticals

Agriculture

Construction

Food industry

Passenger carriage

4M2021, yoy 4M2021 to 4M2019

-49%

-20%

-10%

0%

10%

20%

30%

40%

Q1.20 Q2.20 Q3.20 Q4.20 Q1.21 Q1.20 Q2.20 Q3.20 Q4.20 Q1.21

Industry Services

Other industries Other servicesSupply of electricity Restaurants and hotelsMachine building TransportationMetallurgy Food industryMining of iron ore prod. Vegetable oil and fat prod.Mining excl. iron ore prod. ServicesIndustry

-25

0

25

50

75

100

125

150

-250

0

250

500

750

1 000

1 250

1 500

Q1.18 Q3.18 Q1.19 Q3.19 Q1.20 Q3.20 Q1.21EBITDA of Metinvest, yoyEBITDA of agriholdings, yoyFood price index* (r.h.s.)Сhange in ferrous metalls price** (r.h.s.)





Figure 3.4.7. Gross and net corporate loans, yoy overall decline in interest rates were the main drivers of the

increase in lending in this segment (read more in Drivers of

Lending to Small Businesses).

On the contrary, lending to large corporate borrowers has

been decreasing. Banks are gradually getting rid of the

legacy loans of the largest business groups with bad credit

histories (read more in Box 5. Concentration of Banks’

Corporate Loan Portfolio Declining). Lenders usually have

to provision for these poor-quality loans, or write them off.

Meanwhile, new loans to large borrowers are not sufficient

to replace the assets that have been disposed of. The banks

have tightened their lending standards and mostly try to

attract transparent borrowers with good credit histories. The

new practice of assessing large exposures is a positive

change, as it reduces the probability that systemic risks will

build up.

State-owned enterprises borrowed from banks

because of the crisis

The four largest state-owned enterprises – Naftogaz,

Ukrainian Railways, Ukrenergo, and Energoatom – are

among the largest bank borrowers. All of them made

significant losses in 2020. Ukrainian Railways’ revenues fell

by 17% due to the decline in transportation resulting from

quarantine restrictions and lower business activity.

Ukrenergo and Energoatom incurred losses because of the

energy market crisis, which continues to affect the sector.

Naftogaz’s losses were caused by the debts of gas

suppliers being written off. Performance of other large state-

owned transportation companies was also weak.

State-owned companies almost halved their borrowing

during the two years before the pandemic. However, they

started to actively borrow from banks again during the acute

phase of the pandemic. As of the end of H1 2020, the share

of state-owned enterprises in the net corporate portfolio

reached 15%. The most affected companies sought support

from state-owned banks. With the active phase of the crisis

over, the share of the portfolio of loans issued to state-

owned companies is declining again, and is now at 13%.

The financial performance of corporate borrowers is

mixed, but generally acceptable

The financial performance of corporate borrowers

deteriorated due to the crisis. Last year the weighted

average ratio of net debt to EBITDA grew to 4.9х, up from

3.8х a year ago. The debt burden was the largest in those

sectors that were severely hit by quarantine restrictions: real

estate, hotels, and restaurants. The growth was not critical

for other industries – the debt metrics of some even

improved. The deterioration in the debt burden was partially

the result of one-off or noncash expenses of several large

borrowers.

Indicators varied greatly according to borrower size. The

largest decline in profits and worst deterioration in debt

metrics occurred in the segment of large borrowers. This

was due to two reasons. Firstly, the profits of state

monopolies – which account for a large share of the loan

In solvent banks as of 1 May 2021.

Source: NBU.

Figure 3.4.8. Net corporate loans by groups of non-financial corporations, December 2018 = 100%


Source: NBU.

Figure 3.4.9. Breakdown of corporate borrowers* by debt load

* Performing loans as of 1 Jan. 2021 with outstanding amount of over UAH 2 million.

Source: NBU, data.gov.ua, NBU estimates.

-30%

-20%

-10%

0%

10%

20%

04.18 08.18 12.18 04.19 08.19 12.19 04.20 08.20 12.20 04.21

Net loans in UAHNet loans in FX (USD equivalent)Gross loans in UAHGross loans in FX (USD equivalent)

60%

80%

100%

120%

140%

160%

12.18 04.19 08.19 12.19 04.20 08.20 12.20 04.21To foreign corporationsTo small and micro enterprisesTo 20 largest business groupsTo state-owned corporationsTo others

5% 6% 5%16%

19% 22% 23%

31%7%

18% 14%

18%

69%54% 58%

36%

0%

20%

40%

60%

80%

100%

2017 2018 2019 2020

Negative EBITDA Net debt/EBITDA>7

4≤Net debt/EBITDA≤7 0≤Net debt/EBITDA<4







Figure 3.4.10. Breakdown of corporate borrowers* by debt burden and loan amount

portfolio – dropped. Secondly, there was a deterioration in

the financial standing of companies that belonged to large

business groups and have old restructured debts.

Legacy problems influence loan portfolio quality the

most

The default rate of corporate loans is lower than the NBU

predicted at the start of the coronavirus crisis (read more in

Quality of Corporate Loan Portfolio). The share of total

number of borrowers that defaulted on their loans in the 12-

month period running up to the end of April 2021 was 4%.

However, risks rose significantly in the segment of large

borrowers. Therefore, the amount of debt that migrated to

default was 6%.

Only a few borrowers defaulted in the sectors of real estate,

the hotel business, and electricity supply. However, migration

indicators are high due to the substantial concentration of

loans. Overall, the problems with large exposures primarily

concerned the legacy debts of the largest business groups.

Since the start of the crisis, UAH 8 billion in loans issued to

large business groups defaulted, and UAH 25 billion were

restructured due to the crisis. State-owned banks were the

most active in such restructuring. However, even after

several rounds of restructuring and concessions from banks,

timely debt repayment by several large problem borrowers is

still in question.

* Performing loans as of 1 Jan. 2021 with outstanding amount of over UAH 2 million.

Source: NBU, data.gov.ua, NBU estimates.

Figure 3.4.11. Performing corporate loans as of 1 March 2020, that were restructured and recognized as non-performing since the beginning of the crisis

* Restructuring in accordance with the requirements of the NBU resolution No. 160 of 21 December 2020 (previously – No. 39 of 26 March 2020).

Source: survey of the 22 largest banks, NBU estimates.

Table 2. Corporate loan portfolio as of 1 May 2021

No Sector

Performing loans*, UAH

billions

NPL ratio*, %

Migration to NPL in 12 months* ICR** Net

debt/EBITDA**

by quantity, %

by loan amount, %

2019 2020 2019 2020

1 Agriculture 57 8 3.5 2.0 2.9 2.4 3.9 4.8 2 Mining 8 33 8.0 0.4 9.5 7.7 0.3 0.9 3 Food industry 39 46 4.1 2.8 2.3 3.3 5.7 4.9 4 Light industry 2 7 4.7 0.7 2.7 2.1 3.2 4.1 5 Chemical industry 17 22 2.6 4.0 4.2 3.9 2.8 3.4 6 Constr. materials production 4 2 1.5 0.3 4.4 5.0 3.7 4.0 7 Metallurgy 18 17 4.5 3.7 2.8 3.5 4.6 4.0

8 Machine building 15 64 3.4 4.0 3.6 2.8 3.6 4.4

9 Electricity and other utilities 65 14 6.5 6.8 3.1 1.1 2.6 5.5 10 Construction 19 42 6.9 4.1 2.7 1.9 4.8 6.2 11 Trade in vehicles 4 18 0.5 0.2 4.1 4.1 2.1 3.1 12 Wholesale 95 33 3.5 5.3 4.8 3.6 3.2 4.0 13 Retail 20 83 2.0 0.0 2.9 2.9 3.9 4.7 14 Transportation 27 27 4.0 1.4 4.2 1.3 2.2 4.8 15 Hotels 1 85 20.0 88.5 2.9 0.0 5.3 9.8 16 Cafes and restaurants 0.5 15 5.3 1.3 1.3 1.6 8.7 8.8 17 Real estate 30 49 5.0 13.1 2.7 1.5 6.4 8.6 18 Other 30 37 5.1 3.5 3.5 3.6 3.1 3.4 Total 451 41 3.9 6.0 3.7 2.8 3.8 4.9


* Loans with outstanding amount of more than UAH 2 mln.

** Borrowers with performing loans as of 1 January 2021. Weighted by the loan amount.

9% 13%

28%16%

19%

31%

53%

24%13%

15%

15%

27%

59%

41%

4%

33%

0%

20%

40%

60%

80%

100%

<100 UAH mln 100–500 UAH mln

500 UAH mln –2 UAH bn

>2 UAH bn

Negative EBITDA Net debt/EBITDA>7

4≤Net debt/EBITDA≤7 0≤Net debt/EBITDA<4

0%

2%

4%

6%

8%

10%

12%

0

7

14

21

28

35

42

06

.20

08

.20

10

.20

12

.20

02

.21

04

.21

06

.20

08

.20

10

.20

12

.20

02

.21

04

.21

Restructured loans* NPLs

Private banks, UAH bnState-owned banks, UAH bnForeign banks (excl. Russian), UAH bnShare of restructured portfolio (r.h.s.)Share of NPLs (r.h.s.)




Box 5. The concentration of the banks’ corporate loan portfolio is declining

Loan concentrations pose significant risks to the stability of the banking system, and to financial stability in general. The risks

associated with lending to large borrowers and business groups largely materialized during the 2014–2016 crisis10.

Concentrations of large exposures11 have since materially declined across the system, but in some banks the problem persists.

Most corporate banks have an excessive share of large debtors in their portfolios. These banks need to diversify their lending.

In recent years, the concentration of large exposures and

loans to large business groups in the corporate portfolio of

the banks has decreased. The level of credit concentration in

the banking system today is acceptable: large exposures

make up 29% of the total net corporate loan portfolio.

However, the risks have not completely disappeared. The

level of concentration in some banks is still high. The share

of the 20 largest borrowers in the net corporate portfolio of

the 10 largest banks is in the 25%–52% range.

The NBU limits the credit risks from large borrowers and

groups of connected clients by imposing prudential ratios on

individual banks. However, it is also important to control the

credit concentration risk of the entire banking system. The

high concentration of business group loans poses elevated

risks: operational or financial troubles at one of a group’s

companies in a particular industry often lead to the

termination of debt servicing by all companies in the group.

This can create problems for many banks.

Loans to the 20 largest business groups12 represent 32% of

the corporate portfolio of all banks. Over the past four years,

this share has decreased by 12 pp. A significant portion of

these are NPLs, mainly of state-owned banks. These NPLs

are almost completely provisioned. According to the NPL

management strategy, banks should remove such loans from

their balance sheets in the coming years. At the same time,

the 20 largest in net loans terms business groups account for

20% of the corporate portfolio. This share has declined over

the past four years by 14 pp. The reduction in credit

concentrations due to the writing-off of legacy large NPLs and

active lending to small and medium-sized businesses has led

to the diversification of risks.

Figure В.5.1. Share of large loans and loans of the 20 largest business groups in the corporate portfolio of banks

Source: NBU.

The decline in credit concentration and the improvement in

the quality of large corporate loans are the results of changes

in the banks’ lending policies and regulatory reforms. Over

the past few years, the NBU has encouraged the banks to

assess the credit risks of large borrowers and business

groups more conservatively. In particular, the banks should

rely on the consolidated audited financial statements of

groups under joint control. Companies that take out loans of

more than UAH 200 million must have their financial

statements audited. To better monitor credit risk, the NBU

stress-tests the largest bank borrowers. The regulator has

also created and updated a register of business groups.

Figure В.5.2. Net loans of the 20 largest business groups from the 20 largest banks, April 2021

The fringe nodes around the network represent 20 largest banks in terms of net corporate loans. Nodes inside the circle show 20 largest business groups relative to net exposure to these business groups. Links between the nodes reflect net exposures of the banks to business groups; thickness of lines is proportionate to the loan size.

Source: NBU.

The NBU is working on new approaches to assessing large

exposures, which will widen the scope of their coverage.

The regulator will continue to constantly monitor the quality of

large exposure assessments and the level of debt

concentrations so as to prevent the accumulation of systemic

risks. The banks must diversify their portfolios, avoid large

concentrations, and take into account the financial

statements of the whole group and not just individual

companies when assessing credit risks.

10 Financial Stability Report, June 2017. Box: Loan concentration risks require stricter controls. 11 Loans to a single debtor or a group of connected companies or counterparties that exceed 10% of the bank’s regulatory capital. 12 The 20 largest business groups do not include the groups of companies that are related to the former shareholders of CB PrivatBank JSC and their affilia tes.

0%

20%

40%

60%

80%

0

100

200

300

400

03.1

7

12.1

7

12.1

8

12.1

9

12.2

0

04.2

1

03.1

7

12.1

7

12.1

8

12.1

9

12.2

0

04.2

1

03.1

7

12.1

7

12.1

8

12.1

9

12.2

0

04.2

1

Large loans 20 largest businessgroups by gross loans

20 largest businessgroups by net loans

Net loans, UAH billions Provision, UAH billions

NPL ratio (r.h.s.) % of total loans (r.h.s.)

Foreign banks

State-owned banks Private banks

20 largest business groups

https://bank.gov.ua/admin_uploads/article/FSR3eng_final.pdf?#page=23



3.5. Banks’ Risks of Investing in Domestic Government Debt Securities

As in the majority of other countries, Ukraine’s deficit widened during the pandemic. Banks were active in financing the deficit by

investing in domestic government debt securities, the yields of which rose. The growth in holdings of domestic government debt

securities was fueled by the sector’s high liquidity, weaker demand for loans, and the launch of NBU long-term refinancing. At

the same time, the purchasing of government bonds did not replace lending: the largest banks combined the expansion of their

loan portfolios with investing in government debt. In 2021, the share of government debt securities in banks’ assets may fall. A

gradual decline in the fiscal deficit and more opportunities for the government to raise funds will reduce the banks ’ role in financing

the budget.

Figure 3.5.1. Government domestic debt securities (GDDS) by outstanding nominal volume, share in net assets and State budget deficit

Banks’ holdings of domestic government debt securities

(T-bonds) grew during the crisis

In 2020, the government had to incur large expenditures to

overcome the consequences of the COVID-19 pandemic. It also

scheduled implementation of large-scale infrastructure projects

for this period. The state budget deficit thus reached a record

high for the past decade. At the same time, official foreign

financing was limited, in particular due to the delay in the IMF

program, while nonresidents’ demand for domestic government

debt securities was weak. The need for financing increased

over the year, which naturally raised the expected yields on

government debt instruments.

Part of the required financing came from banks buying

domestic government debt securities. The banks had large

liquidity buffers, while demand for loans weakened markedly as

the pandemic started. Moreover, demand for government

bonds increased as their yields rose. Overall, in 2020, volumes

of hryvnia domestic T-bonds on the banks’ balance sheets

increased by 68% in terms of principal13. As a result, the share

of principal outstanding for T-bonds grew by 6 pp, to 28.5% of

the banks’ total assets. A small The share of this growth is

small, at 4.1% of the total, due to an increase in the capital of

one of the state-owned banks.

Bank investment in government debt instruments grew

significantly during the coronavirus crisis in other countries as

well. This was the main source of financing for the increased

budget deficit. In Ukraine, as in the majority of countries, banks’

investment in government securities peaked last year, and then

stabilized or declined in 2021.

Refinancing loans spurred the buying of domestic

government debt securities

In order to counter the effects of the epidemic on the economy

and the financial sector, the NBU in April 2020 launched long-

term refinancing for a term of one to five years. Through this,

the banks gained access to stable long-term funding, which

they could use at their own discretion – in particular for lending

or buying T-bonds. Overall, since April 2020, the share of

refinancing loans in the banks’ liabilities has grown from 0.6%

to 4.4%. At a fifth of banks, primarily small ones, NBU

refinancing accounts for more than a third of liabilities.

The growth in refinancing loans accelerated at the end of last

year. In Q4 2020, the spread between yields on hryvnia T-

bonds and interest rates on refinancing loans temporarily

increased from 3 pp to 5 pp. Taking advantage of the market

conditions, many banks started to increase their T-bonds

portfolios. At present, in 35 banks – one of which is state-owned

Source: NBU, since 2014 – at solvent banks.

Figure 3.5.2. Government debt held by banks (growth rate in 2020)

Ukrainian data based on government domestic debt securities.

Source: ECB, NBU.

Figure 3.5.3. Average weighted cost of NBU refinancig and yields on Ukrainian government domestic debt securities, % per annum

* Maturity of these bills was close to one year at the moment of placement. There were no issues of these bills during certain periods.

Source: NBU.

13 This section contains data on domestic government debt securities in circulation by outstanding nominal volume.

0%

5%

10%

15%

20%

25%

30%

0

100

200

300

400

500

600

2009 2011 2013 2015 2017 2019 04.21

GDDS, outstanding nominal volume, UAH billions

Share of GDDS in net assets (r.h.s.)

State budget deficit, % GDP (r.h.s.)

0% 50% 100% 150%

SlovakiaPortugal

ItalyFinlandFrance

GermanyCroatia

BulgariaRomaniaSweden

SpainLithuaniaHungary

LatviaPoland

Czech RepublicUkraineEstonia

0%

2%

4%

6%

8%

10%

12%

14%

16%

01.20 03.20 05.20 07.20 09.20 11.20 01.21 03.21 05.21

Cost of refinancing loans

Yield on 1-year government bills*



Figure 3.5.4. Change in refinancing loans and banks’ investment in hryvnia government domestic debt securities (GDDS)*, UAH biilions, end-2019 = 0

– the share of refinancing loans in liabilities exceeds 5%. These

banks account for 88% of all NBU refinancing loans and almost

tripled their T-bonds portfolios during the crisis, in part funded

by refinancing loans.

In 2021, the spread between the yields on domestic

government debt securities and refinancing loan rates

narrowed noticeably. This reduced demand from the banks,

especially from small ones, which had viewed such

investments as one of their main sources of income. In general,

financial institutions’ T-bonds holdings has remained almost

unchanged since the start of the year.

While investing in domestic government debt securities,

the banks did not curtail their lending

The banks’ investment in government debt did not limit their

ability to lend to the economy. Financial institutions had large

liquidity cushion and received access to refinancing loans. This

allowed them to invest in domestic government debt securities

while not reducing their lending appetite. The increase in loan

portfolios of large banks was mostly proportionate to the growth

in their holdings of government securities. In the long term,

lending is much more beneficial for banks, because on top of

interest income it brings additional advantages: proceeds from

servicing customer transactions and cash inflows to current

accounts. The growth in corporate hryvnia lending has been

accelerating, albeit insignificantly. Among the 20 largest banks,

only at 5 banks did loan portfolios not grow in parallel with their

T-bonds holdings.

Growth in the portfolio of domestic government debt

securities will be moderate

As in the rest of the world, Ukraine will gradually reduce its

budget deficit as the economy recovers. According to the

Budget Declaration, the deficit will gradually narrow to 2.7% of

GDP in 2024, thus reducing the government’s financing needs.

A decline in risks related to the coronavirus crisis will gradually

widen the opportunities for deficit financing from other sources.

The government’s need to attract bank financing will thus

decline substantially this year. Furthermore, the NBU is to

phase out its emergency measures for bank support in the near

future – in particular its long-term refinancing. In such a way,

the banks’ T-bonds portfolios are expected to stabilize in size,

and their share in the banks’ net assets should decline.

Investing in T-bonds carries interest rate risk

Banks have traditionally viewed domestic government debt

securities, especially hryvnia-denominated ones, as risk-free

instruments, as they pose no credit risk and there are no

requirements to cover them with capital. However, the T-bonds

price is susceptible to changes in market conditions, in

particular interest rates. The latter usually surge in periods of

stress, leading to a fall in prices of securities and causing losses

for investors. This year, the NBU will take this risk into account

for the first time when conducting its annual stress testing of

banks. This is in line with established European approaches to

stress testing and to the IMF’s methodology.

* Change in debt principal. Excluding GDDS issued to recapitalize state-owned banks.

Source: NBU.

Figure 3.5.5. Government domestic debt securities* owned by banks in nominal terms by share of the loans in their liabilities as of 1 May 2021, UAH billions**

* Excluding government debt securities issued to recapitalize state-owned banks. ** In all currencies at the exchange rate fixed as of 1 January 2020.

Source: NBU.

Figure 3.5.6. Change in Government domestic debt securities* and net credit to clients at Top-20 banks**, UAH billions

* Excluding government debt securities issued to recapitalize state-owned banks. The change is measured from May 2020 to April 2021. ** All currency exchange rate fixed on 01.01.2020. Excluding two largest state-owned banks.

Source: NBU.

-20

0

20

40

60

80

100

120

140

12.19 02.20 04.20 06.20 08.20 10.20 12.20 02.21 04.21

GDDS in hryvnias Refinancing loans

0

50

100

150

200

250

300

350

400

12.18 04.19 08.19 12.19 04.20 08.20 12.20 04.21

Share of refinancing loans of over 5% of liabilities

Share of refinancing loans of up to 5% of liabilities

Took no refinancing loans

-6

-4

-2

0

2

4

6

8

10

-6 -4 -2 0 2 4 6 8 10

Ch

an

ge

in

ne

t cre

dit v

olu

me

Change in GDDS volume

Proportional increase in

GDDS and loans

Preference to investment

into GDDS



3.6. Profitability Risk

The banks’ profitability remained resilient to the coronavirus crisis. The sector retained its operating efficiency mainly due to

decreased funding costs. The quick adaptation of the banks to working under the quarantine restrictions and the rapid recovery

in demand for banking services spurred an increase in fee and commission income. Expenses on loan loss provisioning were

moderate. Going forward, the major profitability risk stems from an expected squeeze in net interest margins. The effect from

decreased funding costs has been exhausted, and loan rates will fall in future.

Figure 3.6.1. Distribution of banks’ assets by ROE

The sector remained highly profitable

Despite the crisis, the sector’s financial performance remains

strong. In January – April 2021, 26 banks that own almost

two-thirds of the sector’s assets had an ROE of more than

15%. That said, the sector’s average ROE dropped

compared to the pre-coronavirus crisis period. There was a

decrease in the profits generated by several large banks,

including Privatbank. On the other hand, financial institutions

saw their capital rise.

The sector’s substantial profits resulted from rapid growth in

net interest and net fee and commission income. Over the

first four months of 2021, the total increase in this income

was 20% year-on-year. The ratio of this income to assets

remains high, exceeding 8%. Operating expenses also

increased, albeit at a much slower pace, and decreased

compared to assets. As a result, the sector’s operating

efficiency remained high. This year’s financial performance

has been adversely affected by a revaluation of the indexed

domestic government debt securities held by state-owned

banks. But for this factor, the banks’ operating income for the

first four months of 2021 would have increased. The CIR

stood at 55.1%. However, net of the revaluation effect, the

ratio reduced to 49.6%, being close to last year’s figure.

Low funding costs will support the interest margin

Over the past few quarters, the banks have achieved a

significant decline in their interest expenses. For instance, in

Q1, interest expenses dropped by almost one third in annual

terms. The sharp decline in interest expenses was brought

about by the fall in interest rates on corporate and retail

funding that began in 2020. The banking sector’s high

liquidity and steady inflows of customer deposits contributed

to the drop in interest rates. The cost of the banks’ liabilities

fell along with interest rates because of the short maturities

of retail and corporate deposits. The larger share of demand

deposits in total funding also helped reduce interest

expenses, as these deposits normally bear no interest.

The downward trend in hryvnia interest rates halted in March.

The NBU raised its key policy rate twice in response to higher

inflation risks. With rising inflationary pressures and higher

interest rates on risk-free instruments, the banks are likely to

keep their current interest rates on hryvnia retail deposits

unchanged for a long time. Thus, the long-lasting effect of

lower interest rates on funding will wane this year.

Only some segments are facing profitability risks

The structure of the sector’s interest income has changed

over the last year. The share of income from securities has

risen markedly since late 2020, driven by an increase in the

portfolio of domestic government debt securities. Meanwhile,

the share of interest income from corporate loans has

Data adjusted since 2017.

Source: NBU.

Figure 3.6.2. Ratio of operating income and costs components to net assets

Source: NBU.

Figure 3.6.3. Banks’ operational efficiency

* Of securities, foreign currency and financial derivatives.

Source: NBU.

0%

20%

40%

60%

80%

100%

2007 2009 2011 2013 2015 2017 2019 Q1.21

ROE<0% 0%≤ROE<5% 5%≤ROE<10%

10%≤ROE<15% 15%≤ROE<30% ROE≥30%

0%

2%

4%

6%

8%

10%

Q1.19 Q2.19 Q3.19 Q4.19 Q1.20 Q2.20 Q3.20 Q4.20 Q1.21

Net іnterest income Net commission income

Administrative costs Other operating costs

0%

10%

20%

30%

40%

50%

60%

70%

-6

-3

0

3

6

9

12

15

Q1.18 Q3.18 Q1.19 Q3.19 Q1.20 Q3.20 Q1.21

Result of revaluation and trading operations, UAH billions

CIR (r.h.s.)

CIR excluding revaluation* (r.h.s.)



Figure 3.6.4. Change in interest income and interest costs, yoy declined. Interest rates on these loans fell rapidly, while the

portfolio of these loans has grown slowly. The long-term rise

in the share of interest income from retail loans came to a

halt, mainly as a result of reduced retail lending during the

crisis.

The banks’ net interest margins depend on the main types of

credit products they offer. Unsecured consumer loans

remain the largest source of profit for the banks. The profits

generated by corporate loan portfolios are significantly lower,

as they have been affected by a long-lasting cycle of interest

rate cuts. Nevertheless, the simultaneous decrease in

funding costs enabled practically all banks, regardless of

their business model, to maintain high net interest margins,

despite these margins decreasing somewhat. Net interest

rate margins will narrow more quickly as the effect of falling

liability costs wears off. The narrowing in net interest margins

will result in part from growth in the segments targeted by

state support programs: mortgages and loans to small and

medium businesses.

Banks focusing on corporate lending that have historically

high funding costs and a large share of long-term deposits

will be at risk over time. This category currently comprises

several non-systemically important banks and one state-

owned bank. Reliance on refinancing loans is an additional

risk factor for some banks. The NBU plans to curtail

refinancing loans in the near future, compelling the banks to

look for alternative funding sources to ensure further growth.

What is more, current interest rates on refinancing loans are

higher than average interest rates on corporate and retail

deposits.

Fee and commission income will rise in the long run

For a long time, receipts from payment transactions have

been the main source of the banks’ fee and commission

income. Other services, such as lending and FX

transactions, generate less than one fifth of the banks’ net

fee and commission income. Corporate clients settled their

transactions mostly online even before the crisis, therefore

these transactions were practically unaffected by quarantine

restrictions. In contrast, the restrictions impacted payments

made by retail clients, in particular, those made with payment

cards.

Each time stricter quarantine restrictions were imposed,

there was a decrease in transactions that required customers

to be present in shopping outlets, such as POS terminal

transactions. Conversely, e-commerce surged, propelled,

among other things, by P2P payments. Demand for

contactless payment technologies and payments using

mobile payment instruments continued to grow. The diversity

of payment transactions enabled the banks to offset the

losses they sustained in some segments by expanding

transactions in other segments. Therefore, the January

lockdown had a weaker impact on fee and commission

income than the shock that occurred at the onset of the

pandemic. With households already used to the advantages

of remote servicing, the risk of a slump in fee and

Source: NBU.

Figure 3.6.5. Interest income components

Source: NBU.

Figure 3.6.6. Interest rates on assets and liabilities of banks and net interest margin

Upper and lower edges of green rectangles represent the first and the third quartiles of the indicator distribution across the banks for the date. Dashes inside the rectangle show the median. Upper and lower dashes outside the rectangle show the minimum and maximum.

Source: NBU.

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Q1.19 Q3.19 Q1.20 Q3.20 Q1.21

Net interest income Interest income Interest cost

0

5

10

15

20

25

30

35

40

Q1.18 Q3.18 Q1.19 Q3.19 Q1.20 Q3.20 Q1.21

Others From securities From retail loans From corporate loans

7.0% 6.0%

3.8%

13.9%12.6%

9.8%

7.0%

6.0%5.2%

0%

5%

10%

15%

20%

25%

Q1.19 Q1.20 Q1.21 Q1.19 Q1.20 Q1.21 Q1.19 Q1.20 Q1.21

Іnterest rate on assets, %

Interest rate onliabilities, % per

annum

Net interest margin,%



Figure 3.6.7. Interest rates on assets and liabilities commission income during quarantine is now significantly

lower than a year ago.

Over the first four months of 2021, net fee and commission

income grew by 23% yoy. As the economy recovers further,

the variety of transactions on which fees are payable will

become greater. Certain risks to fee and commission income

are posed by legislative initiatives to amend the rules for

setting interchange fees. The drop in these fees is set to

decrease the banks’ income, especially that of those banks

most active on the payment card market. The banks are most

likely to offset this negative impact through unwinding bonus

programs, including cashback programs. Going forward, the

change in terms on card products may affect the banks’

growth indicators in the retail segment.

Provisioning has returned to its pre-crisis levels

During the 2020 crisis, most banks reported a drop in the

quality of their assets and made additional provisions. The

ratio of provisions to the banks’ net loan portfolio (CoR)

almost doubled last year, hitting 3.4%. That said, some

banks have made practically no adjustments to their

expected credit losses compared to the pre-crisis period.

Several banks even improved their assessments of expected

losses. Conversely, some banks reported CoR values of

above 20%. However, some of these banks increased their

provisions for their legacy bad loans, which were not linked

to the current crisis.

An asset quality review in early 2021 revealed that most

banks accurately assessed last year’s credit risk. The

rebound in economic activity expected this year will enable

the banks to improve their assessments and even release

some of their provisions. Over the first four months of 2021,

the banks’ total credit risk losses were on average 1.9% of

the loan portfolio. In the absence of new macroeconomic

shocks or any significant delayed effects of the pandemic on

certain sectors, provisioning will on average remain

moderate, and will have no profound effect on profitability.

Source: NBU.

Figure 3.6.8. Cost of Risk

* Annualized loan loss provisions to the net loan portfolio. The dotted line shows the average value of the Cost of Risk for the corresponding year.

Source: NBU.

Figure 3.6.9. Distribution of banks by Cost of Risk*

* Annualized provisions for loans to net loan portfolio.

Source: NBU.

0%

5%

10%

15%

20%

25%

30%

03.18 09.18 03.19 09.19 03.20 09.20 03.21

On retail deposits

On corporate deposits

On other retail loans

On retail mortgages

On corporate loans

On T-bills and NBU certificates of deposit

0%

2%

4%

6%

8%

10%

0%

20%

40%

60%

80%

100%

Q1.18 Q3.18 Q1.19 Q3.19 Q1.20 Q3.20 Q1.21

Provisions for exposures to net interest income

All provisions to net operating profit

Cost of Risk* (r.h.s.)

-20%

-10%

0%

10%

20%

30%

Co

st o

f risk, %

2019 2020



Box 6. Post-Covid “Normality” in the Global Financial Sector

The coronavirus crisis has accelerated changes in the financial sector: the number of bank branches has been reduced, clients

have been shifted to remote servicing, employees have been moved to working remotely, cyber threats have increased, and

the role of cash has fallen. This is shaping a “new normal”.

The coronavirus crisis has sped up certain financial sector

trends that were emerging before the crisis. These trends will

have a significant impact on the banks’ business models,

expenses and operational risks, thus shaping post-crisis

working environments in the sector.

The reduction in the number of branches and pivoting

to working and providing services online

The decrease in financial institution branches, which began

globally a decade ago, is continuing. The pandemic has given

fresh impetus to this process.

High health and safety requirements and some restrictions on

physical contact with customers are likely to remain. This will

complicate the operation of small financial institutions,

especially those that cannot offer online services. It will also

promote the consolidation of such institutions and the wider

supply of comprehensive financial services. For instance,

Poland’s Financial Stability Committee is encouraging Polish

credit unions to consolidate.

Remote working practices will persist in the financial and

other sectors. 43% of chief information officers surveyed

globally14 said they intended to continue having employees

work remotely when the pandemic is over.

Figure В.6.1. Index of number of branches of EU credit institutions and banks of Ukraine, 31 Dec 2014 = 100%

Source: ECB, NBU.

At the same time, new remote channels, mainly digital ones,

for handling customers are developing. The IT component of

financial institutions’ expenses is rising. These trends, which

began before the coronavirus crisis, accelerated in 2020. It is

expected that banks will work together more with fintech

companies. Despite a decline in the number of agreements

entered into in H1 2020, over 2020 as a whole, global

investment in fintech exceeded USD 105 billion, according to

KPMG estimates. Alternative payment platforms could

compete with banking payment systems in the future.

14 Harvey Nash/KPMG CIO Survey of chief information officers (CIOs) from 4,219 leading companies in 83 countries. 15 Phishing is a type of fraud used to steal sensitive data. Malware is malicious software that blocks a computer, provides attackers with access to that computer, and collects data.

The rising frequency and gravity of cyber threats

41% of chief information officers surveyed last year (Harvey

Nash/ KPMG CIO Survey) said there had been an increase

in cyber attacks, mainly through phishing and malware15.

According to data provided by the Bank for International

Settlements about a quarter of cyber attacks are launched on

the financial sector. The Fed Chair recently rated cyber risks

as second only to a new pandemic wave in terms of

seriousness. The rising number of online payments,

simplified identification procedures, and remote work are

attracting the interest of attackers. Fraud victims are losing

increasingly more time and money to cyber attacks. Large

companies and state authorities are being targeted ever more

frequently. Totalitarian regimes or terrorist groups are often

behind such attacks. Examples of large-scale attacks include

four systemically important banks in Greece having to replace

15,000 payment cards in January 2020 following a hacker

attack on a tourist company, a DDoS attack on Hungarian

banks and communications systems in September, and the

Colonial Pipeline cyber attack in May 2021, which resulted in

the halting of the largest U.S. oil pipeline and a ransom of

USD 4.4 million being paid to the attackers. This threat can

be addressed in the main by strengthening cybersecurity and

enhancing financial literacy.

Figure В.6.2. Average cost of ransomware incidents globally and average recovery time from such incidents

Source: Coveware Global Ransomware Marketplace Report.

Cashless payments are on the rise

The increase has been facilitated by the perception of cash

as a vector of infection, especially at the start of the

pandemic, and the rise of instant 24/7 payments. In actual

fact, 2020 saw a strengthening of existing trends: McKinsey

estimates that the share of cash payments in total payments

declined from 2010 through 2020 by an average of 10 pp in

emerging markets, while shrinking even more in advanced

economies and in China. Ukraine witnessed an almost 23%

increase in the amount of cashless payment card

transactions last year (compared to a rise of 38.6% in 2019

and 55% in 2018). The share of such payments in Q1 2021

hit 90%.

40%

50%

60%

70%

80%

90%

100%

110%

2014 2015 2016 2017 2018 2019 2020Czech R. Croatia Hungary Poland

Romania Euroarea Ukraine Lithuania

0

5

10

15

20

25

0

50

100

150

200

250

Q3.18 Q1.19 Q3.19 Q1.20 Q3.20 Q1.21Average cost of incident, USD thousandsDays to recover (r.h.s.)



3.7. Funding risk

The cost of the banks’ liabilities has decreased over the last year-and-a-half. Time deposits are losing popularity with

households because of low term premiums, while the share of funds on demand deposits is rising. This is pushing funding

costs down. Although the banks offer very low interest rates on FX deposits, they have limited opportunities to invest these

funds. A substantial share of funding being held in current accounts is a new reality the banks will have to face in the coming

years. Nevertheless, such funding remains stable. The banks can rely on this funding when lending, and this was taken into

account, among other things, when setting the new net stable funding ratio (NSFR) requirement.

Figure 3.7.1. Composition of liabilities Low interest rates and the pandemic have changed the

structure of the retail deposit market

For a long time, the banks have been raising practically all of

their funding on the domestic market. Currently, 84% of the

sector’s total liabilities are split equally between retail and

corporate deposits. The last year-and-a-half has seen

sweeping changes in the maturity composition of funding, in

particular that of retail deposits. The share of time deposits

started to decline noticeably in early 2020, with growth in

demand deposits outpacing that of time deposits markedly.

The main reason for this was a sharp drop in interest rates

on time deposits.

Rates, especially those on FX deposits, are currently at

historic lows, discouraging customers from making long-term

deposits. This has decreased funding costs, driving the

banks’ profits up. Retail banks that actively work with card

products and have a significant share of demand deposits

have the lowest interest rates on household deposits.

The shift in households’ preferences also contributed to the

change in the maturity composition of retail funding.

Households starting keeping larger portions of their funds on

current accounts to make online payments, among other

things. What is more, during quarantine, households did not

spend the money in their payroll accounts on travel,

entertainment and other non-basic needs. Fear that they

may lose their source of income and the desire to create a

safety cushion against the possibility of illness or the loss of

a job encouraged households to accumulate money on their

current accounts.

As a result, the share of demand deposits in retail deposits

soared to 51.5% in April 2021, up from 39.1% in late 2019.

The flight of funds to current accounts is also seen in many

other European countries, where interest rates dropped

earlier and where the share of demand deposits is even

greater than that in Ukraine.

The cost of FX funding is very low

Interest rates on FX deposits fell most of all. Banks owned

by foreign banking groups cut their interest rates almost to

zero in 2020, with state-owned banks following suit in early

2021. Interest rates on time FX deposits seldom exceed 1%

per annum, as a result of which practically all new FX

receipts to customer accounts remain in demand accounts.

Over the year, the share of these funds in retail FX deposits

grew by 11.2 pp, to 44.9% in April 2021, and it continues to

rise.

Source: NBU.

Figure 3.7.2. Share of demand deposits in retail deposits

Source: ECB, NBU, Central banks.

Figure 3.7.3. Cost of liabilities and share of zero-rate liabilities by banks as of 1 May 2021

Source: NBU.

28% 27% 26% 21% 21%

13% 15% 17% 21% 22%

11% 10% 9% 10% 9%

26% 25% 31% 32% 32%

2% 1%1% 4% 4%14% 13% 8%

6% 5%7% 8% 8% 6% 7%

0%

20%

40%

60%

80%

100%

12.17 12.18 12.19 12.20 04.21

Retail time deposits Retail demand deposits

Corporate time deposits Corporate demand deposits

NBU loans Funds from banks and IFIs

Others

57%

54%

61%

77%

82%

50%

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

12.19 02.20 04.20 06.20 08.20 10.20 12.20 02.21

Bulgaria Romania Croatia

Hungary Poland Ukraine

0%

2%

4%

6%

8%

10%

12%

0% 20% 40% 60% 80% 100%

Co

st o

f lia

bili

tie

s,%

Share of zero-rate liabilites, %



Figure 3.7.4. Yield to maturity (YTM) of Oschadbank eurobonds and 12-month Ukrainian Index of Retail Deposit Rates (UIRD) in USD*, % per annum

As the banks can only invest their FX funds in low-interest

instruments, they must offer low interest rates on FX deposits

to maintain their interest margins. Since the cost of the

funding the banks can raise on the external markets is

relatively high, they are raising practically no foreign funding.

In April 2021, the share of external funding in the banks’

liabilities was only 5%, and consisted of Eurobonds and the

funds of international financial institutions.

The banks will rely on short-term funding

Decreasing maturities of retail deposits is a trend that is

unlikely to change in the foreseeable future. This raises a key

question of whether this funding base is stable. In

international practice, funding from households, in particular

that held in current accounts, is considered stable. This is

reflected in the methodology for calculating two liquidity

ratios developed by the Basel Committee. The liquidity

coverage ratio (LCR) has a relatively low outflow ratio (of 3%

to 10%) for retail deposits, while the net stable funding ratio

(NSFR) assumes that 95% of households’ current accounts

can fund long-term assets.

This was not the case in Ukraine during the two previous

crises, when customer fund outflows were significant and

sometimes even paralyzed the operations of some banks.

However, the reform of the banking sector instilled

customers with trust in financial institutions. The previous

year of crisis has shown that funding from households is

stable, despite being short-term. The pandemic did not result

in the materialization of liquidity risk, as outflows of hryvnia

deposits were seen for less than two weeks at the onset of

the pandemic. Since then, outflows have resumed, with their

pace rising sharply. Although outflows of FX deposits were

also short-lived, their further growth was moderate.

A new requirement – the net stable funding ratio –

encourages the banks to rely to a considerable extent on

funding from households. To calibrate this ratio, the NBU

chose a more conservative approach to available stable

funding (ASF) ratios than is envisaged by the relevant Basel

standard. In contrast to the Basel standard, the NBU

differentiated available stable funding ratios for retail

deposits with maturities of up to one year. These parameters

leave the banks sufficient stimuli to attract funds for longer

periods, for instance, by offering additional term premiums.

The NSFR requirement was introduced on 1 April 2021. All of

the banks, except one, have exceeded the minimum required

level of 80%. Over a year, the required minimum amount will

be gradually increased to 100%. However, a third of banks

already have ratios 1.5 times in excess of the required

amount.

* 5-day moving average. Eurobonds maturing on 20 March 2025 were placed on 1 September 2015 with 9.625% couppon. Currently, USD 200 million-worth securities are in circulation. Yield-to-maturity (YTM) of coupon bonds – Internal rate of return (IRR) of a bond – depends on purchase price, nominal value, coupon payments, time to maturity.

Source: Thomson Reuters, CBonds, NBU estimates.

Figure 3.7.5. Distribution of banks by NSFR reading as of 1 April 2021, number of banks

Source: NBU.

Table 3. Available stable funding (ASF) ratios for retail deposits

ASF ratios (Basel)

ASF ratios depending on the residual maturity (NBU)

Demand Up to 6 months

From 6 to 12 months

Over one year

90‒95% (up to 1 year)

100% (over 1 year)

40% 55% (up to 3 months),

75% (3‒6

months)

85% (6‒9

months) 90% (9‒12

months)

100%

Source: BIS, NBU.

0

2

4

6

8

10

12

14

16

18

20

12.16 08.17 04.18 12.18 08.19 04.20 12.20

Oschadbank 2025 12-month UIRD

1

5

9

26

32

0

5

10

15

20

25

30

35

NSFR <80%

80% ≤ NSFR < 100%

100% ≤ NSFR < 120%

120% ≤ NSFR < 150%

NSFR ≥ 150%

Required ratio

from 1 Apr 2021

80%

from 1 Apr 2022

100%



3.8. Changes in the Regulatory Environment

In H1 2021, parliament adopted laws that are important for the financial sector and that aim to protect consumers, in particular

borrowers who took out FX consumer loans. The NBU approved new rules for taking corrective action against non-banks and

the requirements that financial service providers disclose their ownership structure. It also introduced the net stable funding

ratio.

Parliament passed important financial sector laws

designed to:

- protect consumers during the course of past due debt

workout (No. 1349-ІХ), which will come into effect on 14 July

2021. According to the new rules, the activity of collection

agencies that recover past-due consumer loans for financial

institutions will be strictly regulated. The operation of debt-

collectors will be supervised by the NBU. Lenders (banks and

finance companies) will be required to monitor the behavior

of the debt collectors they engage. They will also be

prohibited from contracting entities that are not on the list of

registered collection agencies. The law regulates all stages

of the process: from designating and registering debt-

collectors, to their dealings with consumers. In May, the NBU

launched a special web page about the future registration of

collection agencies. All operating collection agencies are

required to submit a packet of documents to the NBU to be

listed in the register;

- restructure FX loans and simplify insolvency

proceedings for FX loan borrowers (No. 1381-IX,

No. 1382-IX, and No. 1383-IX), which came into effect on 23

April 2021. Among other things, law No. 1381-IX sets forth

that those borrowers who were not in arrears on their FX

consumer loans as of 1 January 2014 or who had repaid their

past-due loans by the day of restructuring may use the

restructuring terms provided for in this law. Their FX debt will

be converted at the average exchange rate of the hryvnia to

the relevant foreign currency. This exchange rate will be

calculated as the arithmetic mean of two NBU official

exchange rates: the one in effect on the day the loan is

restructured and the one that was in effect when the loan was

issued. After having their loans restructured, borrowers will

be given ten years to repay their loans; they will also be

allowed to repay their debts before the ten-year period is up.

What is more, this law lifts the moratorium on foreign currency

mortgage foreclosure from 23 September 2021. Laws No.

1382 and No. 1383 streamline insolvency proceedings for

borrowers of FX loans and decrease the tax burden on

households that arises when a portion of their debt is

forgiven.

Approved requirements for the ownership structure of

financial service providers

In April 2021, the NBU approved the requirements for the

ownership structure of financial service providers, while also

setting clear-cut criteria for their transparency (NBU Board

Resolution No. 30). All non-bank financial institutions (apart

from credit unions), lessors, and also postal operators that

have been authorized to provide some financial services, are

required to provide the NBU with information about their

ownership structures and post it on their websites by 17 June

2021. In addition, all companies that apply to the NBU for a

license will also be required to provide information about their

owners and the relationships between them. Companies with

non-transparent ownership structures are required to change

their ownership structures so as to comply with the new

requirements by 17 October 2021. The NBU has also

launched a dedicated webpage that provides detailed

information about the stages of disclosing ownership

structures, common schemes used to conceal who the real

owners are, explanations and examples of filled out

documents for market participants, and a FAQ section about

how to prepare documents.

A new long-term liquidity ratio introduced

The central bank made the decision to introduce the net

stable funding ratio (NSFR) and approved the method for

calculating it in late 2019. The initial NSFR requirement and

the transitory period for its introduction were determined on

the basis of test calculations conducted since mid-2020. The

banks will be required to comply with the NSFR in all

currencies and ensure that the NSFR calculation and

monitoring are done separately in the domestic and foreign

currencies. Under the NSFR implementation timeframe, the

banks must ensure that their indicators meet the required

ratios, which will be at least:

80% – from 1 April 2021

90% – from 1 October 2021 and

100% – from 1 April 2022.

The main purpose of the NSFR is to encourage the banks to

rely on more stable and long-term funding sources. This will

address the maturity mismatch and help mitigate a systemic

risk to financial stability that is posed by reliance on short-

term bank funding.

Setting temporary requirements for licensing non-bank

financial service market participants

In March 2021, the NBU approved temporary licensing

conditions for non-bank financial institutions and lessors. The

document sets out the requirements for obtaining a license

that grants the right to provide financial services, as well as

the requirements license holders must comply with when

providing financial services. It also outlines a list of

documents to be submitted to obtain a license, and the

procedure for revoking (cancelling) a license. In actual fact,

the approaches to licensing nonbanks introduced by the

previous regulator remain unchanged, with the licenses

issued by the National Commission for State Regulation of

Financial Services Markets continuing to be in effect after the

above document came into force. The revised licensing

requirements set out the procedure for revoking (cancelling)

licenses at an institution’s request, cancel the requirement

that entities submit their financial statements to obtain a

license to provide leasing services, while also requiring non-

https://bank.gov.ua/en/supervision/licensing-nonbanking/reg-cc

https://promo.bank.gov.ua/transparent-nonbank-market/



bank financial institutions to submit annual reports based on

the results of a mandatory audit of their annual financial

statements.

After approving the temporary licensing conditions, the NBU

started developing a new regulation on licensing and

registering financial service providers, and on requirements

for providing financial services. Among other things, the new

rules will change the procedures for issuing licenses,

approving acquisitions of qualifying holdings, assessing the

eligibility criteria of institutions’ top managers, and assessing

the financial health of institutions.

New rules approved for taking corrective action against

non-bank financial institutions

The NBU has set out the procedure for taking corrective

action against non-bank financial service market participants

for failing to comply with applicable laws and regulations,

including those that protect the rights of financial service

consumers.

The central bank introduced a proportionate approach to

corrective action. The new rules stipulate procedures for the

following types of corrective action: the requirement to rectify

the violation, the requirement that a financial institution call

an unscheduled meeting of its shareholders, the imposition

of a fine, the suspension or cancellation of an institution’s

license, removing a company from the register, and entering

into an agreement in writing. The rules also provide for

additional corrective actions for high-risk market participants

(insurers and credit unions), such as approving a recovery

plan, suspending an institution’s top managers, and

appointing a provisional administration. There are also

corrective actions for non-bank financial groups. If the NBU

identifies non-compliance with consolidated supervision

laws, the central bank will have the right to raise certain

mandatory ratios and limit some transactions.

Remote inspections of banks during quarantine

introduced

The NBU has ensured the continuity of banking supervision

under quarantine, while also reducing risks to the health of its

staff and the staff of other banks. During quarantine,

inspection group members will be granted remote access to

documents and information of the inspected entity and use

removable data storage media. Paperwork drawn up during

inspections can be submitted as electronic documents signed

with an e-signature by an authorized person.

The list of systemically important banks updated

Pursuant to the Regulation on the Procedure for Identifying

Systemically Important Banks (SIBs), the NBU identifies such

banks on an annual basis, using data available of as 1

January of the relevant year. In February 2021, the NBU

approved the current list of systemically important banks,

which comprises 13 financial institutions. The methodology

for identifying SIBs is based on recommendations made by

the European Banking Authority. Detailed information about

SIBs is available on the NBU’s new web page list of SIBs,

which, among other things, contains infographics and links to

the relevant regulations.

SIBs, together with the NBU, were included in the list of

critical infrastructure entities of the Ukrainian banking system,

which was drawn up for the first time pursuant to the

Ukrainian Law On the Basic Principles of Cybersecurity in

Ukraine.

https://bank.gov.ua/en/supervision/about/sib

National Bank of Ukraine Recommendations


Recommendations

Financial stability requires coordinated work between all financial market participants – the

NBU, banks, nonbank financial institutions, and market regulators – as well as the active

support of the state authorities. The NBU makes recommendations to government authorities

and financial institutions, and communicates its near-term goals and plans.

Recommendations to State Authorities

Ensure the full implementation of conditions for cooperation with international donors

Ukraine has thus far managed to receive only the first tranche of around USD 2.1 billion of its

USD 5 billion Stand-by Arrangement with the IMF. Under the initial schedule, the third review

of the program was to have taken place on 15 May, and the total amount received was to

have reached USD 4.2 billion. To receive the remaining funds, the state must meet all of its

commitments under this and previous programs. The program with the IMF guarantees that

Ukraine will orderly repay its external debt, with minimal risks to macroeconomic and financial

stability.

Pass legislation aimed at promoting financial sector development:

amendments to the Law of Ukraine On Banks and Banking (No. 4367) intended to improve

the system of corporate governance and internal control at banks, and to further harmonize

capital requirements with EU legislation, including changes to the structure of capital.

Furthermore, this bill clarifies certain provisions concerning the consolidated supervision of

banking groups, bank licensing, approval of the acquisition of a qualifying holding in a bank,

and requirements for bank ownership structures.

draft laws On Financial Services and Financial Companies (No. 5065), On Insurance (No.

5315), and On Credit Unions (No. 5125). The current legislation is outdated and does not

correspond to global standards or the risks of the sector. The new draft law are based on the

NBFI regulation practices used in the EU. Specifically, the bill on insurance has at its core the

EU’s Solvency II Directive. This legislation is intended to ensure a transparent ownership

structure and a risk-based approach to supervision, streamline licensing, improve corporate

governance requirements, and regulate the market behavior of market participants. These

bills have already passed first reading.

on improvement of mechanisms for the resolution of banks (No. 4546). This draft law

aims to strengthen the DGF’s mandate to resolve the banks, making resolution more effective.

The document has passed first reading. Its adoption will help preserve the bank’s assets,

prevent the loss of these assets, and satisfy claims of as many creditors of insolvent banks as

possible.

draft law on payment services (No. 4364), aimed at bringing up to date the regulation of

Ukraine’s payments and transfers market and establishing a legal framework for integrating

the Ukrainian payments market into the European market. This bill has already passed first

reading.

Create conditions for transactions with agricultural land and for its use as collateral in

bank lending

The land market was launched from July 2021. In the initial years, the law limits the purchase

of land to 100 hectares, so that small farmers will be the market’s main participants. Loans

partially guaranteed by the government should become an important tool for the financing of

these businesses. The Law On the Partial Guarantee Fund for Agricultural Loans (No. 3205–

2) should be passed to provide guarantees for loans to small- and medium-sized agricultural

producers. This will reduce the banks’ risks and simplify lending to farmers for purchasing land

and financing production.

Resolve the Deposit Guarantee Fund’s solvency problem

The Financial Stability Council (FSC) has approved the mechanism for restructuring the debts

of the Deposit Guarantee Fund (DGF), which aims to restore its solvency and the resilience

of the deposit guarantee system. The FSC has recommended that the DGF’s current liabilities



to the government and future interest payments be converted into contingent liabilities. A draft

law that reflects the FSC’s recommendations has already been drawn up. This document has

received a positive response from international financial institutions. To improve the protection

of depositors, the guaranteed amount of deposit is slated to gradually increase to UAH

600,000, starting in 2023 (No. 5542–1). In addition, Oschadbank is expected to join the deposit

guarantee system.

Enhance the regulation of the primary real estate market and ensure its transparency

The primary real estate market remains unregulated and opaque. The situation is complicated

by the protracted reform of the architectural and construction control system. Draft Law No.

5091, which proposes more reliable mechanisms for financing construction, could partially

resolve the problems in the primary real estate market, in particular by introducing a

guaranteed share of construction and state registration of construction site ownership. It is

also important to increase the transparency of the market for new buildings through the full

disclosure by construction participants.

Carry out judicial reform and restore confidence in the judiciary

Currently, financial sector practitioners view the activities of law enforcement and the judiciary

as key systemic risks. To ensure the legal rights of creditors, investors, and depositors, it is

necessary to complete the reform of the judicial system in line with the recommendations of

international experts. This will also facilitate reduction of the cost of loans. At present, the high

cost of borrowing is partly the result of the inadequate protection of the creditor rights, who

cannot rely on the judiciary when seeking justice.

Recommendations to the banks

Most of the recommendations to the banks made in the previous issues of the Financial

Stability Report remain relevant. In addition, it is recommended that the banks do as follows.

Continue to work on reducing the NPL portfolio

The process of resolving NPLs has slowed recently. State-owned banks need to keep

pursuing their NPL reduction strategies.

Update recovery plans

The NBU has processed the resumption plans first submitted by the banks in late 2020. The

experiences of drawing up these plans were summarized, and the banks have been provided

with recommendations on the components of the plans that may require additional refinement.

The NBU expects that the banks will follow these recommendations when updating their plans,

which they must do by 1 October.

Prepare for the imposition of new capital requirements

In H2 2021, the risk weights for unsecured consumer loans will increase. At the start of 2022,

capital requirements for operational risk are to be introduced, and the ICAAP/ILAAP

implementation requirements will take effect. The NBU will also set the schedule for activating

the capital conservation buffer and the systemic importance buffer. Preliminary estimates

show that banks are generally prepared for the new requirements, and that the additional

burden on capital ratios will be negligible.

Step up efforts to restructure FX mortgages

In April 2021, three laws were passed to regulate the process of restructuring FX mortgages.

At the same time, the moratorium on foreclosure on FX mortgages was extended until

September this year. Financial institutions should speed up the process of clearing their

balance sheets of FX mortgages, in particular through restructuring. These laws stipulate that

restructuring must be initiated by borrowers. However, the banks need to actively

communicate with their borrowers, explain the new laws, and encourage the settlement of bad

debts.

Recommendations to Nonbank Financial Institutions

Ensure a transparent ownership structure

The deadline granted to nonbank financial institutions to disclose their ownership structures

expired in June. If their ownership structures do not meet the requirements, financial



institutions must also submit action plans to eliminate the discrepancies. These plans must be

implemented by mid-October. Going forward, market practitioners who are in breach of

ownership structure requirements may come under sanctions.

Ensure the timely filing of reports

Despite a long transition period, a number of nonbank financial institutions are still not

reporting to the NBU. Some of them have not reported at all since July 2020. At the same

time, the reports that have been filed sometimes contain inconsistencies and errors. The poor

quality and incompleteness of this information hinder effective regulation and supervision.

Therefore, institutions that have technical and organizational difficulties with reporting need to

speed up the process of resolving them. All financial institutions must file reports, even if they

are dormant. If they plan to close down, they must voluntarily return their licenses.

Meet solvency requirements

As of 1 April 2021, 44 insurers and 9 credit unions were in breach of minimum solvency

requirements. Since the start of the year, some non-bank financial institutions have been

subject to various corrective measures for violating solvency requirements. These measures

ranged from requests to eliminate violations to suspensions of licenses. Currently, the

solvency requirements for all nonbank financial institutions are moderately conservative, take

into account the market conditions, and do not create an excessive regulatory burden. Rather,

compliance is intended to minimize the risks to consumers of financial services.

The NBU’s plans and intentions

Start phasing out long-term liquidity support for banks

The NBU will gradually unwind its emergency liquidity support measures introduced in

response to the COVID crisis, including long-term refinancing and interest rate swaps.

Maturity of deposit certificates will roll back to 14 days, the pre-crisis level.

Enhance capital requirements in line with international standards

In H2 2021, risk weights for unsecured consumer loans will be raised to 150% from the

current 100%. When the requirements for the implementation of ICAAP/ILAAP

(assessment of internal capital adequacy and internal liquidity) take effect, this will be the

final step in the introduction of new standards for setting up risk management systems in

banks.

The introduction of minimum requirements for capital coverage of operational risk is

scheduled for 1 January 2022.

Starting 1 January 2022, the next stage of raising the risk weights for FX domestic

government debt securities will begin. The risk weights will first increase to 50% and then,

on 1 July 2022, to 100%.

Complete the stress testing of banks, publish the results at the end of the year

After a one-year break due to COVID-19, the NBU has resumed annual stress testing.

Ukraine’s 30 largest banks are now undergoing the tests. Stress testing is being carried out

under two scenarios: baseline and adverse. The adverse scenario simulates the

materialization of credit, interest rate, and currency risks. A feature of this year’s stress testing

is the inclusion of a shock to the yield on government securities that leads to losses. Stress

testing will be completed in the summer, and the results will be published by the banks at the

end of the year.

Finalize the requirements for banks to calculate market risk

The development of a relevant regulation based on the Basel Standards will be completed

this year. Market risk will be assessed by four components: interest rate and stock risk of the

trading book, and currency and commodity risk of the banking and trading book. Ukraine will

implement a Simplified Standardized Approach to calculate the risk, given the small volume

of banks’ trading books and the low complexity of financial instruments. The introduction of

this approach to market risk assessment will not lead to a significant tightening of bank capital

requirements.



Abbreviations and terms

BIS Bank of International Settlements

CCAR Core capital adequacy ratio

CDS Credit default swap

CIR Cost-to-income ratio

CoR Cost-of-risk

COVID-19, COVID Coronavirus disease 2019

CPI Consumer price index

DGF Deposit guarantee fund

DSTI Debt service to income ratio

DTI Debt to income ratio

EBA European Banking Authority

EBIT Earnings before interest and taxes

EBITDA Earnings before interest, taxes, depreciation and amortization

ECB European Central Bank

EM Emerging markets

EU European Union

FAO Food and Agriculture Organization

Fed US Federal Reserve System

FX Foreign currency/exchange

GDP Gross Domestic Product

ICAAP Internal Capital Adequacy Assessment Process

ICR Interest coverage ratio

IFI International Financial Institutions

IFRS International Financial Reporting Standards

ILAAP Internal Liquidity Adequacy Assessment Process

ILO International Labor Organization

IMF International Monetary Fund

LCR Liquidity coverage ratio

NBFI Non-bank financial institution

MFU Ministry of Finance of Ukraine

NBU National Bank of Ukraine

NFC Non-financial corporations

NSFR Net stable funding ratio

NIM Net interest margin

NPL Non-performing loan

OECD Organization for Economic Co-operation and Development

O/N Overnight (rates)

OPEC Organization of the Petroleum Exporting Countries

Parliament Verkhovna Rada of Ukraine (Supreme Council)

PM Primary (real estate) market

PrivatBank Public Joint-Stock Company Commercial Bank “PrivatBank”

ROA Return on assets

ROE Return on equity

SREP Supervisory Review and Evaluation Process

SSSU State Statistics Service of Ukraine

STSU State Treasury Service of Ukraine

T-bonds and bills Domestic government debt securities

UIIR Ukrainian index of interbank rates

UIRD Ukrainian Index of Retail Deposit Rates

US United States of America

th thousand

mln million

bn billion

sq. m square meters

EUR euro

UAH Ukrainian hryvnia

USD US dollar

pp percentage points

yoy year-on-year

qoq quarter-on-quarter

mom month-on-month

bp basis point

r.h.s. right hand scale

Q quarter

H half-year

M month

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